2 After studying this chapter, you should be able to: Objectives1. Describe the nature of a business.2. Describe the role of accounting in business.3. Describe the importance of business ethics and the basic principles of proper ethical conduct.4. Describe the profession of accounting.5. Summarize the development of accounting principles and relate them to practice.6. State the accounting equation and define each element of the equation.After studying this chapter, you should be able to:
3 Objectives7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.8. Describe the financial statements of a corporation and explain how they interrelate.9. Use the ratio of liabilities to stockholders’ equity to analyze the ability of a business to withstand poor business conditions.
4 Manufacturing Business Types of BusinessesManufacturing BusinessProductGeneral Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
5 Merchandising Business Types of BusinessesMerchandising BusinessProductWal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video retailer
6 Types of Businesses Service Business Disney Entertainment ProductDisney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
7 There are three types of business organizations ProprietorshipPartnershipCorporation
8 A proprietorship is owned by one individual. AdvantagesEase in organizingLow cost of organizingDisadvantageLimited source of financial resourcesUnlimited liabilityJoe’s
9 A partnership is owned by two or more individuals. AdvantagesMore financial resources than a proprietorship.Additional management skills.A partnership is owned by two or more individuals.DisadvantageUnlimited liability.Joe and Marty’s
10 The ability to obtain large amounts of resources by issuing stocks. A corporation is organized under state or federal statutes as a separate legal entity.AdvantageThe ability to obtain large amounts of resources by issuing stocks.DisadvantageDouble taxation.J & M, Inc.
11 Business StrategiesA business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
12 Business StrategiesUnder a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors.Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.
13 Business Stakeholders A business stakeholder is a person or entity having an interest in the economic performance of the business.
14 The Process of Providing Information STAKEHOLDERSInternal:Owners, managers, employeesExternal: Customers, creditors, government1Identify stake-holders.2Assess stakeholders’ informational needs.
15 The Process of Providing Information Design the accounting information system to meet stakeholders’ needs.3Accounting Information System4Record economic data about business activities and events.
16 5 The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employeesExternal: Customers, creditors, government5Prepare accounting reports for stakeholders.Accounting Information System
17 Profession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting.Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
18 Generally Accepted Accounting Principles (GAAP)
19 The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business.The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
20 The objectivity concept requires that the accounting records and reports be based upon objective evidence.The unit-of-measure concept requires that economic data be recorded in dollars.
21 The Accounting Equation Assets = Liabilities + Owners’ Equity The resources owned by a business
22 The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the creditors, which represent debts of the business
23 The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the owners
24 What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
25 On November 1, 2009, Clark organized a corporation that will be known as Net Solutions.
26 a. Clark deposits 25,000 in a bank account in the name of Net Solutions in return for shares of stock in the corporation.Capital Stock25,000 Investment by stockholderCash25,000a.AssetsOwners’ Equity=
27 b. NetSolutions exchanged 20,000 for land. Assets=Owners’ EquityCash Land25,000Capital Stock25,000Bal.=b. –20, ,000Bal. 5,000 20,000 25,000
28 c. During the month, NetSolutions purchased supplies for 1,350 and agreed to pay the supplier in the near future (on account).Owners’Liabilities EquityAssets==Accounts CapitalCash Supplies + Land Payable StockBal. 5, , ,000c , ,350Bal. 5,000 1,350 20,000 1,350 25,000
29 d. NetSolutions provided services to customers, earning fees of 7,500 and received the amount in cash.Owners’Liab EquityAssets=Accounts Capital RetainedCash Supplies + Land Payable + Stock + EarningsBal. 5,000 1,350 20,000 1,350 25,000=d , ,500Fees earnedBal. 12,500 1,350 20,000 1,350 25,000 7,500
30 e. NetSolutions paid the following expenses: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275.Owners’Liab EquityAssets=Accounts Capital RetainedCash Supplies + Land Payable + Stock + EarningsBal. 12,500 1,350 20,000 1,350 25,000 7,500=Expensese. – 3,650 –2,125– 800– 450– 275Bal. 8,850 1,350 20,000 1,350 25,000 3,850
31 f. NetSolutions paid 950 to creditors during the month. Owners’Liab EquityAssets=Accounts Capital RetainedCash Supplies + Land Payable + Stock + Earnings=Bal. 8,850 1,350 20,000 1,350 25,000 3,850f. – 950 – 950Bal. 7,900 1,350 20, ,000 3,850
32 g. At the end of the month, the cost of supplies on hand is 550, so 800 of supplies were used. Owners’Liab EquityAssets=Accounts Capital RetainedCash Supplies + Land Payable + Stock + EarningsBal. 7,900 1,350 20, ,000 3,850=Supplies Expenseg. – 800 – 800Bal. 7, , ,000 3,050
33 h. At the end of the month, NetSolutions pays 2,000 to stockholders. Owners’Liab EquityAssets=Accounts Capital RetainedCash Supplies + Land Payable + Stock + EarningsBal. 7, , ,000 3,050==h. –2,000 –2,000DividendsBal. 5, , ,000 1,050
34 Effects of Transactions on Owners’ Equity Capital StockIncreased byStockholders’ investments+
35 Effects of Transactions on Owners’ Equity Retained EarningsDecreased byDecreased byIncreased byRevenues+Expenses–Dividends–
36 Accounting reports, called financial statements, provide summarized information to the users.
37 Financial StatementsIncome statement—A summary of the revenue and expenses for a specific period of time.Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time.Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date.Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
38 For the Month Ended November 30, 2009 NetSolutionsIncome StatementFor the Month Ended November 30, 2009Fees earned$Operating expenses:Wages expense$Rent expense800 00Supplies expense800 00Utilities expense450 00Miscellaneous expense275 00Transfer this amount to the retained earnings statement.Total operating expensesNet income $
39 Retained Earnings Statement For the Month Ended November 30, 2009 NetSolutionsRetained Earnings StatementFor the Month Ended November 30, 2009Less dividendsRetained earnings, November 30, 2005 $Net income for November $From the income statementTransferred to the balance sheet
40 This balance sheet presented using the account form NetSolutionsBalance SheetNovember 30, 2009From the retained earnings statementAssets LiabilitiesCash $ Accounts Payable $Supplies Stockholders’ EquityLand Capital Stock $25,000Ret. Earnings l,Total liabilities andTotal assets $ stockholder’s equity $This balance sheet presented using the account form
41 Statement of Cash Flows For the Month Ended November 30, 2009 NetSolutionsStatement of Cash FlowsFor the Month Ended November 30, 2009Cash flows from operating activities:Cash received from customers $Deduct cash payments for expensesand payments to creditorsNet cash flow from operating activitiesCash flows from investing activities:Cash payment for acquisition of land (Cash flows from financing activities:Cash received as owner’s investment $Deduct cash withdrawal by ownerNet cash flow from financing activitiesNet cash flow and Nov. 30, 2005 cash bal. $)Should match Cash on the balance sheet
42 Statement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations.Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets.Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.