1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Chapter 01 A CCOUNTING IN B USINESS McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 1 - 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 C 1

3. 1 - 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 C 2

4. 1 - 4 External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision-makers. C 2 U SERS OF A CCOUNTING I NFORMATION

5. 1 - 5 O PPORTUNITIES IN A CCOUNTING C 2

6. 1 - 6 A CCOUNTING J OBS BY A REA C 2

7. 1 - 7 Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics E THICS - A K EY C ONCEPT C 3

8. 1 - 8 C 3 E THICS - A K EY C ONCEPT

9. 1 - 9 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. C 4

10. 1 - 10 The Securities and Exchange Commission is the government agency 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. C 4

11. 1 - 11 I NTERNATIONAL S TANDARDS The International Accounting Standards Board (IASB), an independent group (consisting of 16 individuals from many countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices. IASB C 4

12. 1 - 12 I NTERNATIONAL S TANDARDS C 4

13. 1 - 13 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. C 4

14. 1 - 14 A CCOUNTING A SSUMPTIONS 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. C 4

15. 1 - 15 F ORMS OF B USINESS E NTITIES Sole Proprietorship Partnership Corporation C 4

16. 1 - 16 * Proprietorships and partnerships that are set up as LLCs provide limited liability. C HARACTERISTICS OF B USINESSES * * C 4

17. 1 - 17 Owners of a corporation are called shareholders (or stockholders). Shareholders are not personally liable for corporate acts. When a corporation issues only one class of stock, we call it common stock (or capital stock). C ORPORATION C 4

18. 1 - 18 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 its internal controls are effective. Auditors must verify the effectiveness of internal controls. C 4

19. 1 - 19 T RANSACTION A NALYSIS AND THE A CCOUNTING E QUATION Assets = = Liabilities + + Equity Accounting Equation A 1

20. 1 - 20 Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable A SSETS A 1 Resources owned or controlled by a company

21. 1 - 21 Taxes Payable Wages Payable Notes Payable Accounts Payable L IABILITIES Creditors’ claims on assets A 1

22. 1 - 22 E QUITY Owner’s Claims on Assets A 1

23. 1 - 23 T RANSACTION A NALYSIS E QUATION The accounting equation MUST remain in balance after each transaction. Liabilities Equity Assets =+ P 1

24. 1 - 24 T RANSACTION 1: I NVESTMENT BY O WNERS The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity) On December 1, Chas Taylor invests $30,000 cash to start a consulting business. P 1

25. 1 - 25 T RANSACTION 2: P URCHASE S UPPLIES FOR C ASH The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Chas Taylor’s company, FastForward purchases supplies paying $2,500 cash. P 1

26. 1 - 26 T RANSACTION 3: P URCHASE E QUIPMENT FOR C ASH The accounts involved are: (1) Cash (asset) (2) Equipment (asset) FastForward purchases equipment for $26,000 cash. P 1

27. 1 - 27 T RANSACTION 4: P URCHASE S UPPLIES ON C REDIT The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) FastForward purchases Supplies of $7,100 on account. P 1

28. 1 - 28 T RANSACTION 5: P ROVIDE S ERVICES FOR C ASH The accounts involved are: (1) Cash (asset) (2) Revenues (equity) The company provides consulting services receiving $4,200 cash. P 1

29. 1 - 29 T RANSACTION 6 AND 7: P AYMENT OF E XPENSES IN C ASH The accounts involved are: (1) Cash (asset) (2) Expenses (equity) The company pays $1,000 rent and $700 in salary to the company’s only employee. P 1

30. 1 - 30 S UMMARY OF T RANSACTIONS Other transactions were executed during December and the summary of all transactions is shown below: P 1

31. 1 - 31 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 P 2

32. 1 - 32 The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. I NCOME S TATEMENT P 2

33. 1 - 33 STATEMENT OF OWNER’S EQUITY P 2

34. 1 - 34 The Balance Sheet describes a company’s financial position at a point in time. B ALANCE S HEET P 2

35. 1 - 35 S TATEMENT OF C ASH F LOWS P 2

36. 1 - 36 D ECISION A NALYSIS Return on assets (ROA) is stated in ratio form as income divided by assets invested. Net income Average total assets Return on assets = A 2

37. 1 - 37 1A R ETURN AND R ISK A NALYSIS A 3 Many different returns may be reported. ROA Interest return on savings accounts. Interest return on corporate bonds. Risk is the uncertainty about the return we will earn. The lower the risk, the lower our expected return.

38. 1 - 38 1B - B USINESS A CTIVITIES AND THE A CCOUNTING E QUATION There are three major types of activities in any organization: 1.Financing Activities 1.Financing Activities – Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. 2.Investing Activities 2.Investing Activities - Are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. 3.Operating Activities 3.Operating Activities – Involve using resources to research, develop, and purchase, produce, distribute, and market products and services. C 5

39. 1 - 39 END OF CHAPTER 01