COPYRIGHT © 2011 South-Western/Cengage Learning1 PowerPoint Author: Catherine Lumbattis 7/e 77/e /7/e

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

Nonbusiness Entities Government EntitiesPrivate Organizations Federal, State, and Local Governments Hospitals, Universities, Cooperatives

The Nature of Business Activity Financing Activities Investing Activities Operating Activities Examples: borrowing sale of stock purchase of assets sale of products/services costs incurred to operate business LO3

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

Decisions Made with Financial Information Invest?? Borrow $$?? Sell stocks or bonds?? Build new plant?? Add new product line?? Start new business?? Loan $$?? Extend credit $$??

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) = +

Current assets: Cash $ 200 Accounts receivable 600 Land 4,000 Lodge, lifts and equipment 2,500 Total assets $7,300 Top of the World Balance Sheet June 30, 2010 A A = L + SE

Top of the World Balance Sheet June 30, 2010 Liabilities: Accounts payable$ 700 Salaries and wages payable 400 Notes payable 3,000 Total liabilities $4,100 Liabilities and Stockholders’ Equity Total Liabilities and Stockholders’ Equity $7,300 = L A = L + SE Stockholders’ equity: Capital stock$2,000 Retained earnings 1,200 Total stockholders’ equity $3,200 + SE

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

Top of the World Income Statement For the Year Ended June 30, 2010 Revenues: Lift tickets $5,800 Equipment rentals 2,200 Total revenues $8,000 Expenses: Salaries and wages $2,000 Depreciation 100 Water, gas, and electricity 1,500 Insurance 1,100 Interest 300 Income taxes 1,000 Total expenses 6,000 Net income $2,000 Revenues Revenues – Expenses = Net Income 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 ($$$) Ending retained earnings $$$

Top of the World Statement of Retained Earnings For the Year Ended June 30, 2010 Retained earnings, beginning of the year $ 0 Add: Net income for the year 2,000 Deduct: Dividends for the year (800) Retained earnings, end of the year $ 1,200

Top of the World Statement of Cash Flows For the Year ended June 30, 2010 Cash flows from operating activities: Cash collected from customers$ 7,400 Cash payments for: Salaries and wages $ 1,000 Water, gas, and electricity 1,500 Insurance 400 Interest 300 Income taxes 1,000 Total cash payments 4,800 Net cash provided by operating activities $ 2,600

Top of the World Statement of Cash Flows For the Year ended June 30, 2010 Cash flows from investing activities: Purchase of land$(4,000) Purchase of lodge, lift and equipment (2,600) Net cash flows from investing activities $(6,000) Cash flows from financing activities: Proceeds from issuance of long term note$ 3,000 Proceeds from issuance of capital stock 2,000 Dividends declared and paid (800) Net cash flows from financing activities 4,200 Net increase in cash $ 200 Cash at beginning of year 0 Cash at the end of the year $ 200

Income Statement for Year ended June 30, 2010 Revenues $ 8,000 Less: Expenses ( 6,000) Net income $ 2,000 Statement of Retained Earnings for Year ended June 30, 2010 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, 2010 July 1, 2009 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

Accounting as a Social Science  Accounting is a service activity  Accounting is a social science, not a physical science  Accounting principles develop in response to changing business conditions

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

International Accounting Standards  International Accounting Standards Board was created in 2001  There may be significant differences between U.S. and international standards

Auditing  Financial statements are prepared by and are the responsibility of the company’s management  External auditors performs tests and procedures to render an opinion as to the financial statements are fairly presented

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