1. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. The Role of Accounting in Business CHAPTER 1

2. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe the types and forms of businesses, how businesses make money, and business stakeholders Describe the three business activities of financing, investing, and operating Define accounting and describe its role in business Describe and illustrate the basic financial statements and how they interrelate Describe eight accounting concepts underlying financial reporting Financial Analysis: Describe and illustrate how the rate of return on assets can be used to analyze and assess a company’s financial performance

3. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the types and forms of businesses, how businesses make money, and business stakeholders Learning Objective 1

4. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Types of Businesses _____ businesses provide services rather than products to customers. Delta Air Lines (transportation services) The Walt Disney Company (entertainment services) _____ businesses sell products they purchase from other businesses to customers. Walmart (general merchandise) Amazon.com (books, music, videos) _____ businesses change basic inputs into products that are sold to customers. General Motors Corporation (cars, trucks, vans) Dell Inc. (personal computers)

5. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Forms of Business __________

6. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Differences in Forms of Business Organizational Form Ease of Formation Legal LiabilityTaxation Limitation on Life of Entity Access to Capital ProprietorshipSimple_________ Yes__________ PartnershipSimple_________ Yes__________ CorporationComplex_________ No__________ Limited Liability Company Moderate_________ Yes__________

7. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. How do Businesses Make Money? By providing goods and services to customers so that they can make a _____ To maximize their profits, companies may use one of the following two strategies: __________

8. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. How do Businesses Make Money?

9. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Business Stakeholders Business StakeholderInterest in the BusinessExamples ____________Providers of major financing for the business Banks, owners, stockholders _____________Buyers of products or services and vendors to the business Customers and suppliers ______________Collect taxes and fees from the business and its employees Federal, state, and city governments ______________Individual employed by the business Employees and managers

10. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Business Stakeholders

11. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objective 2 Describe the three business activities of financing, investing, and operating

12. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Business Activities _______________ ______________ _______________

13. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objective 3 Define accounting and describe its role in business

14. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Objectives of Financial Accounting Sometimes called the “___________________”, accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business Essentially, it summarizes the financial performance of the firm for external users The two major objectives of financial accounting are: To report the financial condition of a business at a point in time To report changes in the financial condition of a business over a period of time

15. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Two Major Objectives of Financial Accounting Financial Condition As at a _____ __________ Financial Condition As at a _____ __________ Financial Condition Over a _____ __________ Financial Condition Over a _____ __________

16. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objective 4 Describe and illustrate the basic financial statements and how they interrelate

17. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Statements ______________________

18. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Income Statement Summary of revenue and expenses for a specific period of time (e.g., month, quarter, or year) Reports the change in financial condition due to the operations of a business Uses the _____ concept: Expenses for the period are matched against revenues for the same period _____________ – ___________ = ________________

19. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Retained Earnings Statement Reports changes in financial condition due to changes in retained earnings during a period Retained earnings is the portion of ________ retained by the business

20. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Balance Sheet Reports financial condition at a point in time Measured by total assets and claims to those assets: _________ = ____________ + _________

21. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Balance Sheet – Preparation Step 1: Each asset is listed and added to arrive at total assets Step 2: Each liability is listed and added to arrive at total liabilities Step 3:Each stockholders’ equity item is listed and added to arrive at total stockholders’ equity Step 4:Total liabilities and total stockholder’s equity are added together Step 5:__________ must equal total liabilities and stockholders’ equity

22. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows Reports the change in financial condition due to the changes in cash during a period — Net change in operating cash flows — Net change in investing cash flows — Net change in financing cash flows

23. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows – Operating Activities Net cash flows from operating activities is reported first Cash flow from operating activities is a focus of stakeholders Operating activities are transactions that involve the acquisition or production of products and services and the sale of those products or services to customers

24. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows – Investing Activities Net cash flows from investing activities is reported second Cash receipts from selling property, plant, and equipment are reported in this section Cash used to purchase property, plant, and equipment is also reported in this section Negative cash flow from investing activities is normal for an expanding company

25. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows – Financing Activities Net cash flows from financing activities is reported third Any cash receipts from issuing debt or stock are reported in this section Cash payments on debt and dividends are also reported in this section

26. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statements

27. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statements Net income from the income statement is linked to the ____________ Retained earnings is linked to the stockholders’ equity in the ____________ Cash balance from the ____________ is linked to cash in the balance sheet

28. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objective 5 Describe eight accounting concepts underlying financial reporting

29. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. The Accounting “Rules” GAAP - G_____ A_____ A_____ P_____

30. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Eight Accounting Concepts

31. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial History of a Company

32. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounting Frauds

33. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Guidelines for Ethical Conduct

34. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objective 6 Financial Analysis: Describe and illustrate how the rate of return on assets can be used to analyze and assess a company’s financial performance

35. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate of Return on Assets A measure of a company’s profitability Expressed as a percentage or as an amount per dollar invested For example: a 12% rate of return on assets could also be expressed as $0.12 return per $1 invested _____ _____ ______ Rate of Return on Assets ___ ____ ____ ___ ___ ____ _____ =

36. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate of Return on Assets Apple is 3.8 (38.1% 4 10.7%) times more profitable than Dell Inc.

37. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 1