McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 1 Accounting and Business

1-2 What are the Basic Functions of Business? Marketing Human resources Production and operations Finance Accounting and information systems (In Teams determine the functions of each of these and then how they use accounting information—page 3.)

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 from using the money

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  What is Apple?

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

1-6 Trivia Question +1 Al Capone, the infamous Chicago mobster, was actually brought to justice not for murder, but for what? +1 Tax Evasion Elmer Irey, a forensic accountant caught him! He put together enough evidence from Capone’s bank statements and other financial records to indict him on income tax evasion for which he was subsequently sentenced to prison.

1-7 What are the Characteristics of Business Today? Customer-focused operations Global markets Manufacturing and Communications Advances eBusiness Hybrid organizational structures

1-8 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

Cash vs. Accrual Accounting Cash basis accounting  Income is measured as the difference between cash received from customers and the cash paid to employees and other suppliers of goods and services Accrual basis accounting  Income is measured as the difference between sales (revenues) earned and the expenses incurred during the period, regardless of when cash is paid or received

1-10 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

Basic Elements Continued Revenues (accrual basis)  Amounts earned from providing goods and services Expenses (accrual basis)  Amounts incurred in an attempt to generate revenues

1-12 What is __________? Generally accepted accounting principles Financial Accounting Standards Board  Current rule-making body  Pronouncements – Statements of Financial Accounting Standards  Statements of Financial Accounting Concepts GAAP

1-13 What are the Concepts Statements? Concepts Statement #1  Useful information for decision making Concepts Statement #2  Characteristics of accounting information (benefits>costs; materiality, understandability, usefulness) Concepts Statement #3 (superceded) Concepts Statement #4  Objectives for non-business organizations

1-14 Concepts Continued Concepts Statement #5  What information should be presented in financial statements and when that information should be presented Concepts Statement #6  Elements of financial statements Concepts Statement #7  Estimating value of future cash flows

1-15 What Makes Information Useful? Relevance  Capable of making a difference in a decision Reliability  Dependable, must be verifiable, not biased Benefits > Costs  Benefits derived must be greater than cost Materiality  Large enough to have an impact on a decision

1-16 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

1-17 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

1-18 What are the Purposes of the Ratios? Current Ratio  Current Assets/Current Liabilities  Relationship between current assets and current liabilities

1-19 What are the Purposes of the Ratios? Debt to Equity Ratio  Total Debt/Total Shareholders’ Equity  Relationship between liabilities and owners’ equity; measure of company solvency (ability to pay both short- and long-term obligations)

1-20 What are the Purposes of the Ratios? Return on Sales  Net Income/Sales  Relationship between net income and sales; measure of profitability (ability to generate profit from sales)

Lecture Examples 1.A company provided $120,000 of services during the year. They received $100,000 from customers. The company’s employees earned $70,000 in wages, but due to the way payroll is determined (monthly), the employees were only paid $55,000. What is the cash-basis income? What is the accrual-basis income? Answer: Cash basis income: Accrual basis income:

Lecture Examples 2.Describe each of the following items and determine which financial statement it appears on. Accounts payable, $136Building, $809 Accounts receivable, $876Patent, $2 Cash received from customers, $13,074Long-term bank loan, $716 Cash paid for inventory, $8,338Common stock, $3,827 Cash paid to employees, $1,724Retained earnings, $373 Cost of goods sold, $8,192Cash balance, $2,211 Inventory, $908Miscellaneous payables, $529 Miscellaneous operating expenses, $3,686 Sales, $13,353 Wage expense, $1,750

Lecture Examples 3.Using the amounts shown in Lecture Example #2, calculate the current ratio, the debt to equity ratio, and the return on sales ratio. Answer: Current ratio: Debt to equity ratio: Return on sales ratio: