1-1 A CCOUNTING A ND I TS U SE I N B USINESS D ECISIONS CHAPTER 1 [After listening to the lecture comments for this slide, click anywhere on the slide to continue.]

1-2 The Body of Accounting Knowledge [For all slides, click anywhere on the slide to continue.] Inverted Pyramid

1-3 Inverted Pyramid The Body of Accounting Knowledge Chapter 1

1-4 entity For accounting purposes, each business organization, or entity, has an existence separate from its owner(s). The Business Entity Concept

1-5 Forms of Businesses Single Proprietorship PartnershipCorporation

1-6 Single Proprietorships l One owner - the simplest possible form of business

1-7 Single Proprietorships l One owner - the simplest possible form of business l Is not considered a separate legal entity.

1-8 Single Proprietorships l One owner - the simplest possible form of business l Is not considered a separate legal entity. l Many other textbooks start with this form and then move on to corporations.

1-9Partnerships l Two or more owners l Also not considered a separate legal entity. l Are not covered in this course. u Advanced accounting

1-10Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. Owners

1-11Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. board of directors u The owners’ interests are represented by the board of directors. Owners Board of Directors

1-12Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. board of directors u The owners’ interests are represented by the board of directors. l Reason used throughout this text. Owners Board of Directors

1-13 l A corporation is considered a separate legal entity. u pays taxes, can sue and be sued, and is subject to legal penalties. u More on this in Chapter 12. l Stockholders get dividends from the corporation. l What are dividends?  Distributions of profits to owners Corporations Owners

1-14 Three Types of Businesses Service Businesses (Chapters 1-4) Merchandising Businesses (Chapters 16-17) Manufacturing Businesses (Last 2/3 of 2nd semester) Examples of each?

1-15Terminology l Profitability: The ability to generate income. l Solvency: The ability to pay debts as they become due. l Why are they important? Ostensibly, they are the primary objectives of every business l Profitability: The ability to generate income. l Solvency: The ability to pay debts as they become due. l Why are they important? Ostensibly, they are the primary objectives of every business

1-16 The Four Basic Financial Statements Which two are the most important? Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

1-17 Why are Income Statement and Balance Sheet most important? l Because they communicate the profitability and solvency. l Which does which?   Income Statement - Profitability   Balance Sheet - Solvency l Can each be represented with an equation? l Because they communicate the profitability and solvency. l Which does which?   Income Statement - Profitability   Balance Sheet - Solvency l Can each be represented with an equation?

1-18 Inflows of assets resulting from the sale of products or services. Income Statement Model Net Income = Revenues - Expenses

1-19 Costs incurred to produce revenues or, Assets used up in the process of earning revenues. Costs incurred to produce revenues or, Assets used up in the process of earning revenues. Income Statement Model Net Income = Revenues - Expenses

1-20 NET INCOME results when Revenues exceed Expenses for a given period. Income Statement Model Net Income = Revenues - Expenses Caution! Must use the correct accounting definitions! Not yours, not Webster’s and not one from Economics class.

1-21 NET LOSS results when Expenses exceed Revenues for a given period. Income Statement Model Net Loss = Revenues - Expenses

1-22 Balance Sheet Model LiabilitiesLiabilities Stockholders’ Equity AssetsAssets

1-23 Balance Sheet Model Assets = Liabilities + Stockholders’ Equity Things of value owned by the business. Debts owed by the business. (i.e., the creditors’ claims against the assets) Debts owed by the business. (i.e., the creditors’ claims against the assets) Owners’ interest in the business. (i.e., the owners’ claims against the assets) Owners’ interest in the business. (i.e., the owners’ claims against the assets)

1-24 Components of Stockholders’ Equity  Capital stock u Amount the owners have invested in the corporation.  Retained earnings u Net income earned since the beginning of the company, less any dividends paid.  Capital stock u Amount the owners have invested in the corporation.  Retained earnings u Net income earned since the beginning of the company, less any dividends paid.

1-25 Balance Sheet Model Assets = Liabilities + Stockholders’ Equity Retained Earnings Capital Stock Dividends Net Income - +

1-26 Balance Sheet Model _____Sources of assets_____ Why is it called a “Balance Sheet”? Basic algebra Assets = Liabilities + Stockholders’ Equity

1-27 Balance Sheet Model Equities (Claims against the assets) Note, however, that you cannot “tag a dollar”! Assets = Liabilities + Stockholders’ Equity

1-28 Timing of Balance Sheet and Income Statement Income Statement: For the year ended Balance Sheet: At 12-31

1-29 Financial Statements Covered This Semester l Income Statement l Statement of Retained Earnings u Simple example l Balance Sheet u Two types Horizontal and vertical l Income Statement l Statement of Retained Earnings u Simple example l Balance Sheet u Two types Horizontal and vertical 19

1-30 Statement of Retained Earnings l Links the Income Statement with the Balance Sheet l Summarizes changes in Retained Earnings (R/E) for the period l Links the Income Statement with the Balance Sheet l Summarizes changes in Retained Earnings (R/E) for the period

1-31 Statement of Retained Earnings: More Complex Example (p. 20) HEADING R/E - Beginning of Period$ $$$ Add: Net Income for for the Period$$$ Subtract: Dividends for the Period$$$ R/E - End of Period$ $$$

1-32 Retained Earnings Model B/R/E + NI - Dividends = E/R/E

1-33 This assumes that the company in fact has net income. B/R/E + NI - Dividends = E/R/E Retained Earnings Model

1-34 If the company does not have net income, subtract the net loss. B/R/E - NL - Dividends = E/R/E Retained Earnings Model

1-35 B/R/E + NI - Dividends = E/R/E A dividend is a distribution of income to the owners of the corporation. Retained Earnings Model

1-36 The Financial Statement NOT Studied This Semester l Statement of Cash Flows l At this point, simply know that it tells where cash came from and where it went. u “Where got, where gone” l Statement of Cash Flows l At this point, simply know that it tells where cash came from and where it went. u “Where got, where gone”

1-37 Balance Sheet Comparison Corporation vs. Proprietorship (See Appendix, pp ) CORPORATION PROPRIETORSHIP Stockholders' Equity: Owner's Equity: Capital stock $ 100,000 Smith, Capital $150,000 Retained earnings 50,000 ______ Total equity $150,000 Total equity $ 150,000

1-38 ROLL ‘EM ! Video #2Video #1

1-39 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l P. 23 “Underlying Assumptions” u Only know business entity concept for now

1-40 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions?

1-41 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course

1-42 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...?

1-43 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue?

1-44 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue? l P One more transaction l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue? l P One more transaction

1-45 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue? l P One more transaction l P Analyzing and Using Fin. Results l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp Transactions? l P Subsequent use of Summary of Transactions in this course l P Transaction 1b - Why...? l P Transaction 2b - Revenue? l P One more transaction l P Analyzing and Using Fin. Results

1-46Caution! One final caution, especially for those who have had some prior accounting u High School One course Two courses u College Took it and dropped the course Took it and failed the course One final caution, especially for those who have had some prior accounting u High School One course Two courses u College Took it and dropped the course Took it and failed the course

1-47 That’s the end of the topic, Bub! Did you get all that?