Introduction to Accounting and Business 1

Describe the nature of a business, the role of accounting, and ethics in business. 1-4

1-3 Types of Businesses Delta Air LinesTransportation services The Walt Disney CompanyEntertainment services Service Business Service 1

1-4 Merchandising Business Product Wal-MartGeneral merchandise Amazon.comInternet books, music, videos 1 Types of Businesses

1-5 Manufacturing Business Product General Motors Corp.Cars, trucks, vans Dell Inc.Personal computers 1 Types of Businesses

1-6 The Role of Accounting in Business Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. 1

1-7 1 Exhibit 1 Users of Accounting Information

1-8 The area of accounting that provides external users with information is called financial accounting. Financial Accounting The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business. 1

1-9 Ethics are moral principles that guide the conduct of individuals. Role of Ethics in Accounting and Business 1

Exhibit 3Guideline for Ethical Conduct 1.Identify an ethical decision by using your personal ethical standards of honesty and fairness. 2.Identify the consequences of the decision and its effect on others. 3.Consider your obligations and responsibilities to those that will be affected by your decision. 4.Make a decision that is ethical and fair to those affected by it. Let’s look at some examples….

1-11 Summarize the development of accounting principles and relate them to practice

1-12 Financial accountants follow generally accepted accounting principles (GAAP) in preparing reports. Generally Accepted Accounting Principles Within the United States, the Financial Accounting Standards Board (FASB) has the primary responsibility for developing accounting principles. (continued) 2

1-13 Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses. Business Entity Concept 2

% of business entities in the United States. Easy and cheap to organize. Resources are limited to those of the owner. Used by small businesses. A proprietorship is owned by one individual. 2 Business Entity Concept

% of business organizations in the United States (combined with limited liability companies). Combines the skills and resources of more than one person. A partnership is similar to a proprietorship except that it is owned by two or more individuals. 2 Business Entity Concept

1-16 Generates 90% of business revenues. 20% of the business organizations in the United States. Ownership is divided into shares called stock. Can obtain large amounts of resources by issuing stocks. Used by large businesses. A corporation is organized under state or federal statutes as a separate legal taxable entity. 2 Business Entity Concept

% of business organizations in the United States (combined with partnerships). Often used as an alternative to a partnership. Has tax and legal liability advantages for owners. A limited liability company (LLC) combines attributes of a partnership and a corporation. 2 Business Entity Concept

1-18 Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price. 2 Cost Concept

1-19 The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. 2 Objectivity Concept

1-20 The unit of measure concept requires that economic data be recorded in dollars. 2 Unit of Measure Concept

1-21 Cost Concept On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records? Example Exercise

1-22 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. For Practice: PE 1-1A, PE 1-1B Follow My Example 1-1 Example Exercise 1-1 (continued)

1-23 State the accounting equation and define each element of the equation

1-24 The resources owned by a business Assets = Liabilities + Owner’s Equity The Accounting Equation 3

1-25 The rights of the creditors are the debts of the business. Assets = Liabilities + Owner’s Equity 3 The Accounting Equation

1-26 The rights of the owners Assets = Liabilities + Owner’s Equity 3 The Accounting Equation

Accounting Equation John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2009, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: a.Owner’s equity, as of December 31, b.Owner’s equity, as of December 31, 2010, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during Example Exercise

3 Example Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B 1-35 a. Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity Owner’s Equity =$450,000 Follow My Example 1-2 Example Exercise 1-2 (continued) b. First, determine the change in Owner’s Equity during 2010 as follows: Assets = Liabilities + Owner’s Equity $130,000 = –$25,000 + Owner’s Equity Owner’s Equity =$155,000 Next, add the change in Owner’s Equity on December 31, 2009 to arrive at Owner’s Equity on December 31, 2010, as shown below: $605,000 = $450,000 + $155,000

Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 1-36

1-30 A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations. 4 Business Transaction

1-31 On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation. Transaction A 4

1-32 CAPITAL STOCK 25,000 CASH 25,000 a. = Assets Stockholders’ Equity = Transaction A (continued) 4

1-33 Transaction B On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site. 4

1-34 CASH + LAND 25,000 Bal. Assets = = Bal. 5,00020,000 25,000 b. –20, ,000 CAPITAL STOCK 25,000 Stockholders’ Equity Transaction B (continued) 4

1-35 On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future. 4 Transaction C

1-36 CASH + SUPPLIES + LAND 5,000 20,000 25,000 Bal. Assets = = ACCOUNTS CAPITAL PAYABLE + STOCK Stockholders’ Liabilities + Equity Transaction C (continued) c. +1,350 +1,350 Bal. 5,000 1,350 20,000 1,350 25,000 4

1-37 Beginning with Transaction D the asset section will be shown first, then the liabilities and stockholders’ equity will be shown in the following slide. 4

1-38 On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue. Transaction D 4

1-39 CASH + SUPPLIES + LAND 5,000 1,350 20,000 Bal. Assets Transaction D (continued) d. +7,500 Bal. 12, ,000 4

1-40 Transaction D (continued) ACCOUNTS CAPITAL FEES PAYABLE + STOCK + EARNED 1,350 25,000 Bal. Liabilities + Stockholders’ Equity d. +7,500 Bal. 1,350 25,000 7,500 4

1-41 During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses. 4 Expenses

1-42 On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Transaction E 4

1-43 CASH + SUPPLIES + LAND 12,500 1,350 20,000 Bal. Assets Transaction E (continued) e. –3,650 Bal. 8, ,000 4

1-44 Transaction E (continued) ACCOUNTS CAPITAL FEES WAGES RENT UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal. Liabilities + Stockholders’ Equity e. –2,125 –800 –450 –275 Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275 4

1-45 On November 30, 2009, NetSolutions paid creditors on account, $950. Transaction F 4

1-46 CASH + SUPPLIES + LAND 8,850 1,350 20,000 Bal. Assets Transaction F (continued) f. –950 Bal. 7, ,000 4

1-47 Bal. Liabilities + Stockholders’ Equity f. –950 Bal ,000 7,500 –2,125 –800 –450 –275 Transaction F (continued) 4 ACCOUNTS CAPITAL FEES WAGES RENT UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500

1-48 On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550. Transaction G 4

1-49 CASH + SUPPLIES + LAND 7,900 1,350 20,000 Bal. Assets Transaction G (continued) g. –800 Bal. 7, ,000 4

1-50 ACCOUNTS CAPITAL FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. – EXP ,000 7,500 –2,125 –800 –450 –275 Bal. g. –800 Bal ,000 7,500 –2,125 –800 –800 –450 –275 Transaction G (continued) 4 Liabilities + Stockholders’ Equity

1-51 On November 30, 2009, NetSolutions pays $2,000 to stockholders (Chris Clark) as dividends. Transaction H 4

1-52 CASH + SUPPLIES + LAND 7, ,000 Bal. Assets Transaction H (continued) h. –2,000 Bal. 5, ,000 4

1-53 Transaction H (continued) ACCTS. CAPITAL, DIVI- FEES WAGES RENT SUP. UTIL. MISC. PAY. + STOCK – DENDS + EARNED – EXP. – EXP. – EXP. – EXP. – EXP ,000 7,500 –2,125 –800 –800 –450 –275 Bal. Liabilities + Stockholders’ Equity h. –2,000 Bal ,000 –2,000 7,500 –2,125 –800 –800 –450 –275 4

Summary

Exhibit 5 Effects of Transactions on Stockholder’s Equity Net IncomeNet (Loss)

1-56 Transactions Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February: 1.Received cash from owner as additional investment in exchange for capital stock, $35, Paid creditors on account, $1, Billed customers for delivery services on account, $11, Received cash from customers on account, $6, Paid dividends, $1,000. (continued) Example Exercise

1-57 Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Stockholders’ Equity, Dividends, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below. (1) Asset (Cash) increases by $35,000; Stockholders’ Equity (Capital Stock) increases by $35,000. Example Exercise 1-3 (continued)

1-58 Example Exercise 1-3 (continued) (2)Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800. (3)Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250. (4)Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740. (5)Asset (Cash) decreases by $1,000; Dividends increases by $1,000. Follow My Example For Practice: PE 1-3A, PE 1-3B 1-65 Follow My Example 1-3

Describe the financial statements of a corporation and explain how they interrelate. 1-66

1-60 After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements. 5 Financial Statements

1-61 The income statement reports the revenues and expenses for a period of time, based on the matching concept. 5 Income Statement

1-62 The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses. 5 Matching Concept

1-63 The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss. 5

1-64 Net income is carried to the retained earnings statement. 5 Exhibit 6Financial Statements for NetSolutions

Income Statement The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The capital stock was $50,000 and the retained earnings was $30,000 at May 1, 2009, the beginning of the current year. Accounts payable$ 12,200Miscellaneous expense $ 12,950 Accounts receivable31,350Office expense 63,000 Cash53,050Supplies3,350 Fees earned 263,200Wages expense131,700 Land80,000 Prepare an income statement for the current year ended April 30, Example Exercise

CHICKADEE TRAVEL SERVICE INCOME STATEMENT For the Year Ended April 30, 2010 Fees earned$263,200 Expenses: Wages expense$131,700 Office expense63,000 Miscellaneous expense 12,950 Total expenses 207,650 Net income$ 55,550 Example Exercise 1-4 (continued) 5 For Practice: PE 1-4A, PE 1-4B 1-73 Follow My Example 1-3 Follow My Example 1-4

1-67 The retained earnings statement reports the changes in the retained earnings for a specific period of time, such as a month or a year. 5 Statement of Owner’s Equity

1-68 From the income statement To the balance sheet 5 Exhibit 6 Financial Statements for NetSolutions (continued)

Retained Earnings Statement Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a retained earnings statement for the current year ended April 30, Adam Cellini invested an additional $50,000 in the business in exchange for capital stock, and dividends of $30,000 were paid during the year. Example Exercise

CHICKADEE TRAVEL SERVICE RETAINED EARNINGS STATEMENT For the Year Ended April 30, 2010 Example Exercise 1-5 continued Follow My Example For Practice: PE 1-5A, PE 1-5B 1-77 Retained earnings, May 1, 2009$ 30,000 Net income for the year$55,550 Less dividends 30,000 Increase in retained earnings 25,550 Retained earnings, April 30, 2010$155,550

1-71 A balance sheet is a list of the assets, liabilities, and stockholders’ equity as of a specific date. 5 Balance Sheet

1-72 The account form of a balance sheet lists the assets on the left and the liabilities and stockholders’ equity on the right—similar to the design of an account. 5 Account Form

1-73 This amount is compared to the net cash flow on the statement of cash flows. From the retained earnings statement 5 Exhibit 6 Financial Statements for NetSolutions (continued)

Balance Sheet Using the data for Chickadee Travel Service shown in Example Exercises 1-4 and 1-5, prepare the balance sheet as of April 30, Example Exercise

Example Exercise 1-6 (continued) 5 For Practice: PE 1-6A, PE 1-6B CHICKADEE TRAVEL SERVICE BALANCE SHEET April 30, 2010 Assets Liabilities Cash$ 53,050Accounts payable $ 12,200 Accounts receivable31,350 Stockholders’ Equity Supplies3,350Capital stock$100,000 Land80,000Retained earn. 55,550 Total stock- holders’ equity155,550 Total liabilities and Total assets$167,750 stockholders’ equity$167, Follow My Example 1-3 Follow My Example 1-6

1-76 A statement of cash flows is a summary of the cash receipts and payments for a specific period of time. It consists of three sections: (1) operating activities, (2) investing activities, and (3) financing activities. 5 Statement of Cash Flows

1-77 This amount should match Cash on the balance sheet. 5 Financial Statements for NetSolutions (continued) Exhibit 6

1-78 The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations. 5 Operating Activities

1-79 The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets. 5 Investing Activities

1-80 The cash flows from financing activities section reports the cash transactions related to cash investments by stockholders, borrowings, and cash dividends. 5 Financing Activities

Statement of Cash Flows A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below. Cash receipts: Cash received from customers$251,000 Cash received from issuing capital stock50,000 Cash payments: Cash paid for expenses210,000 Cash paid for land80,000 Cash paid for dividends30,000 The cash balance as of May 1, 2009, was $72,050. Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30, Example Exercise

Cash flows from operating activities: Cash received from customers $251,000 Deduct cash payments for expenses 210,000 Net cash flows from operating activities$ 41,000 Cash flows from investing activities: Cash payments for purchase of land(80,000) Cash flows from financing activities: Cash received from issuing capital stock $ 50,000 Deduct cash dividends 30,000 Net cash flows from financing activities 20,000 Net decrease in cash during year$(19,000) Cash as of May 1, ,050 Cash as of April 30, 2010 $ 53,050 Example Exercise 1-7 (continued) 5 For Practice: PE 1-7A, PE 1-7B Follow My Example 1-3 Follow My Example

1-83 Financial Analysis and Interpretation Ratio of Liabilities to Stockholders’ Equity = Total Liabilities Total Stockholders’ Equity For NetSolutions: Ratio of Liabilities to Stockholders’ Equity = $400 $26,050 =