1. Accounting and Business
Chapter 1
Accounting and Business

2. What are the Basic Functions of Business?
Marketing
Human resources
Production and operations
Finance
Accounting and information systems

3. How do the Functions Use Accounting Information?
Marketing
Pricing, distribution costs
Human resources
Pay and fringe benefits, hiring costs
Production and operations
Production costs—actual and budgeted
Finance
Cost of borrowing, benefits expected from using the money

4. How has Business Evolved?
Sole proprietorship
One owner
Partnership
Two or more owners
Corporation
Many owners
Merchandising
Buy and sell products
Service
Provide service
Manufacturing
Make and sell products

5. How has Accounting Evolved?
Determination of wealth
What am I worth today
Determination of income
How has my wealth changed
On-going success
How is the business doing

6. What are the Characteristics of Business Today?
Customer-focused operations
Global markets
Advanced manufacturing and communications
eBusiness
Hybrid organizational structures

7. What are the Basic Concepts of Accounting?
Business entity
Keep business and personal records separate
Monetary unit
Maintain business records in currency
Going concern
Business will continue past the current period
Periodicity
Profits/losses must be determined periodically

8. What are the 5 Basic Elements of Accounting?
Asset
Right to use resources with future benefit
Liability
Obligation to transfer resources in the future to suppliers of goods and services
Owners’ equity
Net assets belong to owners

9. 5 Basic Elements Continued
Revenues (accrual basis)
Amounts earned from providing goods and services
Expenses (accrual basis)
Amounts incurred in an attempt to generate revenues

10. What is GAAP? Generally accepted accounting principles
Financial Accounting Standards Board
Current rule-making body
Pronouncements – Statements of Financial Accounting Standards
Statements of Financial Accounting Concepts

11. What are the Concepts Statements?
Useful information for decision making
Concepts Statement #2
Characteristics of accounting information (benefits>costs; materiality, understandability, usefulness)
Concepts Statement #3 (superceded)
Concepts Statement #4
Objectives for non-business organizations

12. Concepts Continued Concepts Statement #5 Concepts Statement #6
What information should be presented in financial statements and when that information should be presented
Concepts Statement #6
Elements of financial statements
Concepts Statement #7
Estimating value of future cash flows

13. What Makes Information Useful?
Relevance
Capable of making a difference in a decision
Reliability
Dependable
Benefits > Costs
Benefits derived must be greater than cost
Materiality
Large enough to have an impact on a decision

14. What are the 4 Basic Financial Statements and Auditors’ Report?
Income statement
Indicates revenues less expenses = net income for a period of time
Statement of cash flows
Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time
Statement of owners’ equity
Indicates changes in owners’ equity for a period of time

15. Financial Statements Continued
Balance sheet
Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time
Auditor’s report
Indicates whether the company followed GAAP when preparing its financial statements

16. What are the Purposes of the Ratios?
Current ratio
Relationship between current assets and current liabilities
Debt to equity ratio
Relationship between liabilities and owners’ equity; measure of company solvency (ability to pay both short- and long-term obligations)
Return on sales
Relationship between net income and sales; measure of profitability (ability to generate profit from sales)

17. Lecture Examples
A company provided $120,000 of services during the year. They received $100,000 from customers. The company’s employees earned $70,000 in wages, but due to the way payroll is determined (monthly), the employees were only paid $55,000. What is the cash-basis income? What is the accrual-basis income?
Answer:
Cash basis income:
Accrual basis income:

18. Lecture Examples
2. Describe each of the following items and determine which financial statement it appears on.
Accounts payable, $ Building, $809
Accounts receivable, $ Patent, $2
Cash received from customers, $13,074 Long-term bank loan, $716
Cash paid for inventory, $8,338 Common stock, $3,827
Cash paid to employees, $1,724 Retained earnings, $373
Cost of goods sold, $8,192 Cash balance, $2,211
Inventory, $ Miscellaneous payables, $529
Miscellaneous operating expenses, $3,686
Sales, $13,353
Wage expense, $1,750

19. Lecture Examples
3. Using the amounts shown in Lecture Example #2, calculate the current ratio, the debt to equity ratio, and the return on sales ratio.
Answer:
Current ratio:
Debt to equity ratio:
Return on sales ratio: