© 2009 The McGraw-Hill Companies, Inc., All Rights Reserved ACCOUNTING IN BUSINESS Chapter 1

McGraw-Hill/Irwin Slide 2 McGraw-Hill/Irwin Slide 2 Identifying Select transactions and events Recording Input, measure and classify Recording Input, measure and classify Communicating Prepare, analyze and interpret Communicating Prepare, analyze and interpret I MPORTANCE OF A CCOUNTING Accounting C1

McGraw-Hill/Irwin Slide 3 McGraw-Hill/Irwin Slide 3 U SERS OF A CCOUNTING I NFORMATION External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers/Directors Internal Auditors Sales Staff Budget Officers Controllers C2

McGraw-Hill/Irwin Slide 4 McGraw-Hill/Irwin Slide 4 U SERS OF A CCOUNTING I NFORMATION External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers. C2

McGraw-Hill/Irwin Slide 5 McGraw-Hill/Irwin Slide 5  Identify ethical concerns  Analyze options  Make ethical decision Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences. E THICS - A K EY C ONCEPT C4

McGraw-Hill/Irwin Slide 6 McGraw-Hill/Irwin Slide 6 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). G ENERALLY A CCEPTED A CCOUNTING P RINCIPLES Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. C5

McGraw-Hill/Irwin Slide 7 McGraw-Hill/Irwin Slide 7 The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. S ETTING A CCOUNTING P RINCIPLES Financial Accounting Standards Board is the private group that sets both broad and specific principles. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices to create harmony among accounting practices of different countries. C5

McGraw-Hill/Irwin Slide 8 McGraw-Hill/Irwin Slide 8 P RINCIPLES AND A SSUMPTIONS OF A CCOUNTING Cost Principle Accounting information is based on actual cost. Actual cost is considered objective. Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. Matching Principle A company must record its expenses incurred to generate the revenue reported. Full Disclosure Principle A company is required to report the details behind financial statements that would impact users’ decisions. C5

McGraw-Hill/Irwin Slide 9 McGraw-Hill/Irwin Slide 9 P RINCIPLES AND A SSUMPTIONS OF A CCOUNTING Monetary Unit Assumption Express transactions and events in monetary, or money, units. Business Entity Assumption A business is accounted for separately from other business entities, including its owner. Time Period Assumption Presumes that the life of a company can be divided into time periods, such as months and years. Now Future Going-Concern Assumption Reflects assumption that the business will continue operating instead of being closed or sold. C5

McGraw-Hill/Irwin Slide 10 McGraw-Hill/Irwin Slide 10 F ORMS OF B USINESS E NTITIES Sole Proprietorship Partnership Corporation

McGraw-Hill/Irwin Slide 11 McGraw-Hill/Irwin Slide 11 * Proprietorships and partnerships that are set up as LLCs provide limited liability. C HARACTERISTICS OF B USINESSES * *

McGraw-Hill/Irwin Slide 12 McGraw-Hill/Irwin Slide 12 S ARBANES -O XLEY (SOX) Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that issue their stock to the public. Management must issue a report stating that internal control are effective. Auditors must verify the effectiveness of internal controls. CompanyAlleged Accounting Abuses EnronInflating income, hid debt, and bribed officials WorldComUnderstated expenses to inflate income and hid debt Fannie MaeInflated income Adelphia CommunicationsUnderstated expenses to inflate income and hid debt AOL Time WarnerInflated revenues and income XeroxInflated income Bristol-Myers SquibbInflated revenues and income Nortel NetwordsUnderstated expenses to inflate income

McGraw-Hill/Irwin Slide 13 McGraw-Hill/Irwin Slide 13 Liabilities Equity Assets =+ E XPANDED A CCOUNTING E QUATION Revenues Expenses Owner Capital Owner Withdrawals __ ++ __ Owner's Equity Liabilities Equity Assets =+ A1

McGraw-Hill/Irwin Slide 14 McGraw-Hill/Irwin Slide 14 F INANCIAL S TATEMENTS Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows P1

McGraw-Hill/Irwin Slide 15 McGraw-Hill/Irwin Slide 15 END OF CHAPTER 1