1 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting and the Business Environment Chapter 1

1 - 2 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 1 Use accounting vocabulary for decision making.

1 - 3 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber is an information system that... measures business activities, processes information, and... communicates financial information. Accounting...

1 - 4 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber is called the language of business. Accounting...

1 - 5 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber External users make decisions about the entity. External users make decisions about the entity. Internal users make decisions for the entity. Internal users make decisions for the entity. Users of Accounting Information

1 - 6 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Management Accounting Financial Accounting Fields of Accounting

1 - 7 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Public Sector (SEC) Public Sector (SEC) Private Sector (FASB) Private Sector (FASB) Private Sector (AICPA) (IMA) Private Sector (AICPA) (IMA) GAAP The Authority Underlying Accounting

1 - 8 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber AICPA’s Code of Professional Conduct AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants Standards of Ethical Conduct of the Institute of Management Accountants Standards of Professional Conduct

1 - 9 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Proprietorships Partnerships Corporations Types of Business Organizations

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Proprietorships l What are some advantages? – total undivided authority – no restrictions on type of business – must be legal l What are some disadvantages? – unlimited liability – limitation on size – fund raising power

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Partnerships l What are some advantages? – better credit standing – possibly – more brain power, but consultation with partners required l What are some disadvantages? – unlimited personal liability for general partners – need for written partnership agreement

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Corporations l What are some advantages? – separate legal existence – limited liability of stockholders – transferability of ownership relatively easy l What are some disadvantages? – taxes – possible double taxation – extensive governmental regulation

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 2 Apply accounting concepts and principles to business situations.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber To provide information useful for making investment and lending decisions To provide information useful for making investment and lending decisions Generally Accepted Accounting Principles l What is the primary objective of financial reporting?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Entity Concept Example l Assume that John decides to open up a gas station and coffee shop. l The gas station made $250,000 in profits, while the coffee shop lost $50,000.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Entity Concept Example l How much money did John make? l At a first glance, we would assume that John made $200,000. l However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Information must be reasonably accurate. Information must be reasonably accurate. Information must be free from bias. Information must be free from bias. Information must report what actually happened. Individuals would arrive at similar conclusions using same data. Individuals would arrive at similar conclusions using same data. The Reliability (Objectivity) Principle

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assets and services acquired should be recorded at their actual cost. Assets and services acquired should be recorded at their actual cost. The Cost Principle

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The entity will continue to operate in the future. The entity will continue to operate in the future. The Going Concern Concept

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The dollar’s purchasing power is relatively stable. The dollar’s purchasing power is relatively stable. The Stable-Monetary-Unit Concept

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 3 Use the accounting equation to describe an organization’s financial position.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Economic Resources Claims to Economic Resources The Accounting Equation Assets = Liabilities + Owner’s Equity

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assets l What is an asset? l It is something a company owns which has future economic value. – land – building – equipment – goodwill

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Liability l What is a liability? l It is something a company owes. – money – service – legal retainers – product – magazines

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Owner’s Equity l What is owner’s equity? l It is what’s left of the assets after liabilities have been deducted. – the same as net assets – the owner’s claim on the entity’s assets

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Revenues l What are revenues? l They are amounts received or to be received from customers for sales of products or services. – sales – performance of services – rent – interest

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Expenses l What are expenses? l They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. – salaries and wages – utilities – supplies used – advertising

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 4 Use the accounting equation to analyze business transactions.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Business Transactions l What is a transaction? l It is any event that both affects the financial position of the business and can be reliably recorded.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Business Transactions 1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel. 2 Gillen purchases an office location, paying $20,000 in cash. 3 She buys office supplies, agreeing to pay $500 in 30 days. 4 She earns and collects $5,500 revenues.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Business Transactions 5 Gillen performs services, and the client agrees to pay $3,000 within one month. 6 During the month, she pays $3,100 for expenses incurred. 7 Gillen pays $300 to the store from which she purchased $500 worth of supplies. l What is the effect of these transactions on the accounting equation?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Owner’s Assets = Liabilities + Equity 1)Cash+ $30,000+ $30,000 2)Cash– 20,000 Land+ 20,000 3) Supplies )Cash+ 5,500+ 5,500 5)Receivable+ 3,000+ 3,000 6)Cash– 3,100– 3,100 7)Cash– 300– 300 Totals+ $35, $35,400 Accounting for Business Transactions

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Business Transactions l Notice that the equation always stays in balance. l Each transaction affects at least two accounts, sometimes more. l Some transactions affect only one side of the equation; some affect both sides.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Business Transactions l Other transactions that took place were as follows: l The business collected $1,000 from the client. l She sold some land at cost for $9,000. l She withdrew $2,100 from the business.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 5 Prepare and use financial statements.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber – are the final product of the accounting process. – are the final product of the accounting process. – tell how the business is performing and where it stands. – tell how the business is performing and where it stands. Financial Statements...

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Financial Statements – income statement – statement of owner’s equity or retained earnings – balance sheet – statement of cash flows

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 6 Evaluate the performance of business.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Relationships Among the Statements: Income Statement Revenue: Fees earned$8,500 Expenses: Salary expense$1,200 Utilities and telephone expense 400 Equipment rental expense 400 Office rent expense 1,100 3,100 Net income$5,400

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber G. Gillen, capital, April 1, 20xx$ 0 Contribution of capital 30,000 Net income$ 5,400 Cash distributions– 2,100 G. Gillen, capital, April 30, 20xx$33,300 Relationships Among the Statements: Statement of Owner’s Equity

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Relationships Among the Statements: Balance Sheet Assets Cash$ 20,000 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets$ 33,500 Liabilities Accounts payable$ 200 Owner’s equity, G. Gillen, capital 33,300 Total liabilities and owner’s equity$33,500

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Relationships Among the Statements: Statement Of Cash Flows Cash flows from operating activities: Cash receipts from services rendered$6,500 Cash payments: Supplies$ 300 Operating expenses 3,100 3,400 Net cash flows from Operating activities$3,100 Cash flows from investing activities Purchase and sale of land ($11,000)

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cash Flows from Financing Activities: Beginning Balance 0 Investment by Owner$30,000 Withdrawals 2,100 Net Cash Flows from Financing Activities$27,900 Cash at Beginning of Year 0 Cash at End of the Year$20,000 Relationships Among the Statements: Statement Of Cash Flows

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 1