1. Accounting and The Business Environment
Chapter 1
Accounting and The Business Environment

2. Decision Makers Individuals Businesses Creditors Investors
Taxing Authorities

3. Two Fields of Accounting
Financial Accounting
Managerial Accounting
Provides information for external decision makers
Investors
Creditors
Taxing Authorities
Focuses on information for internal decision makers
Managers
Business Owners
Employees

4. S1-2: USERS OF FINANCIAL INFORMATION
Suppose you are the manager of Greg’s Tunes, Inc. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s stockholders’ equity.
Requirements:
Is the banker considered an internal or external user of financial information?
Which financial statement would provide the best information to answer the banker’s questions?

5. The Accounting Profession
Lucrative career with many opportunities
Certified Public Accountants (CPAs)
Certified Public Accountants, or CPAs
Certified Management Accountants, or CMAs

6. Governing Organizations
FASB
SEC
AICPA
GAAP
IASB

7. Ethics in Accounting and Business
Investors and creditors want reliable financial information
Companies want to attract investors
Conflict of Interest

8. Audit
SEC requires companies to have financial statements examined by independent accountants
Auditors will provide an opinion on financial statements, if possible
Recent accounting scandals hurt investor confidence
SOX
PCAOB

9. Standards of Professional Conduct
AICPA
IMA

10. Types of Business Organizations
Proprietorship
Partnership
Corporation
LLC and LLP
Not-for-profit

11. Comparison of Business Forms
Proprietorship
Partners
Corporation
LLC, LLP
Not-for-Profit
Owners
Proprietor:
One Owner
Partners: Two or more
Stockholders: usually many
Members
None
Life of Organization
Limited by owner's choice or death
Limited by owners’ choice or death
Indefinite
Liability of owners for business debts
Proprietor: Owner is personally liable
Partners are personally liable
Stockholders not personally liable
Members are not personally liable
Fiduciary liability
of board members
This slide compares the various types of business organizations in terms of ownership, life of the organization and liability for business debts.

12. Corporate Characteristics
Separate Legal Entity
Continuous Life/Transferability of Ownership
No Mutual Agency

13. Corporate Characteristics (continued)
Limited Liability of Stockholders
Separation of Ownership and Management
Government Regulation A

14. Corporate Characteristics (continued)
Corporate Taxation

15. Organization of a Corporation
Incorporators obtain charter from the state
Charter authorizes corporation to:
Issue stock
Conduct business in accordance with state law
Incorporators agreed to a set of bylaws
Corporations begins to exist when stock is issued

16. Structure of a Corporation

17. S1-4: TYPES OF BUSINESS ORGANIZATION
Chloe Michaels plans on opening Chloe Michaels’ Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Chloe wants the option to raise additional equity easily in the future. Which type of business organization will meet Chloe’s needs best?

18. GAAP Generally Accepted Accounting Principles
Guidelines that govern accounting
Based on a conceptual framework

19. Accounting Principles
Entity Concept
Faithful Representation Principle
Cost
Principle
Going- Concern Concept
Stable Monetary Unit Concept

20. Accounting Principles
Entity Concept
Faithful Representation Principle
Cost Principle

21. Accounting Principles (continued)
Going-Concern
Stable Monetary Unit Concept

22. The Accounting Equation
ASSETS
LIABILITIES
EQUITY
Economic
Resources
Claims to Economic
Resources

23. Assets
Economic resources
Benefit the business in the future

24. Claims to Assets Liabilities Equity Debts payable to outsiders
Owners’ claims to the assets of the business

25. The Accounting Equation
Assets
Liabilities
Equity
Assets
Liabilities
Equity

26. Equity of a Corporation
Liabilities
Assets
Stockholders’ equity
Paid-in capital
Retained earnings

27. Equity of a Corporation
Stockholders’ equity
Paid-in capital
Common stock
Retained earnings
+ Net income (loss)
- Dividends

28. Net Income + Revenues + Net income (loss) Retained earnings - Expenses
- Dividends

29. Revenues Amounts earned by delivering goods or services to customers
Sales revenue
Service revenue
Interest revenue
Dividend revenue
Revenues are increases in retained earnings from delivering goods or services to customers. Revenues are earnings.
There are relatively few types of revenue, including the following:
● Sales revenue: Greg’s Tunes earns sales revenue by selling CDs to customers.
● Service revenue: Smart Touch Learning earns service revenue by providing e-learning services.
● Interest revenue: Interest revenue is earned on bank deposits and on money lent out to others.
● Dividend revenue: Dividend revenue is earned on investments in the stock of other corporations.

30. Expenses
Outflows of assets or increasing liabilities in the course of delivering goods or services to customers
Store or rent expense
Salary expense
Advertising expense
Utilities expense
Interest expense
Property tax expense
Expenses are the decreases in retained earnings that result from operations.
Unfortunately, businesses have lots of expenses. Some common expenses are as follows:
● Store (or office) rent expense
● Salary expense for employees
● Advertising expense
● Utilities expense for water, electricity, and gas
● Insurance expense
● Supplies expense for supplies used up
● Interest expense on loans payable
● Property tax expense

31. Assets Liabilities Equity
E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE ACCOUNTING EQUATION
Select financial information for three corporations follows:
Requirements:
1. Compute the missing amount in the accounting equation for each entity.
Assets
Liabilities
Equity
New Rock Gas
$24,000
$50,000
DJ Video Rentals
$75,000
$32,000
Corner Grocery
$100,000
$53,000
$74,000
$ ?
$43,000
$ ?
$47,000
$ ?
Exercise 1-16 determines missing amounts in the accounting equation for three corporations.

32. 2. List the seven main characteristics of a corporation.
E1-16: CONTINUED
2. List the seven main characteristics of a corporation.
3. Which accounting concept tells us that the previous three corporations will continue to exist in the future?
Continuous Life and transferability
Corporate taxation
Government regulation
Limited Liability of Stockholders
No Mutual Agency
Separate Legal Entity
Separation of ownership and managers
The exercise continues on this slide.
Going Concern Concept

33. Transaction
An event that affects the financial position of the business
Can be measured reliably
Every transaction impacts at least two items
The accounting equation balances before and after each transaction

34. E1-21: USING THE ACCOUNTING EQUATION TO ANALYZE TRANSACTIONS
Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events:
Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C.
Assets
Liabilities
Stockholders’ Equity
Date
Cash
Medical supplies
Land
Accounts payable
Common stock
Retained earnings
Jul 6
$ 55,000
Bal
$ 0 9
(46,000)
46,000
$9,000
$46,000
$55,000
Exercise 1-21 shows you how to use the accounting equation to analyze transactions.

35. E1-21: CONTINUED Assets Liabilities Stockholders’ Equity Date Cash
Medical supplies
Land
Accounts payable
Common stock
Retained earnings
Jul 12
$1,800
Bal
$9,000
$46,000
$55,000 $0 15
15-31
8,000
$17,000
$8,000 29
(1,600)
(900)
(100)
The exercise continues on this slide.

36. E1-21: CONTINUED Assets Liabilities Stockholders’ Equity Date Cash
Medical supplies
Land
Accounts payable
Common stock
Retained earnings
Bal
$14,400
$1,800
$46,000
$55,000
$5,400 30
(700)
$1,100 31
(1,100)
$13,300
$ 0
The exercise continues on this slide.

37. Preparing the Financial Statements
Income Statement
Balance Sheet
Statement of Retained Earnings
Statement of Cash Flows

38. Income Statement

39. Statement of Retained Earnings

40. Balance Sheet

41. Statement of Cash Flows

42. P1-36A: PREPARING FINANCIAL STATEMENTS
Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, At December 31, 2012, the business’s accounting records show these balances:
Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012:
a. Income statement
b. Statement of retained earnings
c. Balance sheet
Insurance expense
$ 8,000
Accounts receivable
Cash
37,000
Note payable
12,000
Accounts payable
7,000
Retained earnings
47,000
Advertising expense
3,000
Salary expense
25,000
Service revenue
80,000
Equipment
50,000
Dividends
31,000
Common stock
29,000
Problem 1-36A asks us to prepare financial statements based on provided account data.

43. Studio Photography, Inc.
P1-36A: CONTINUED
Studio Photography, Inc.
Income Statement
Year Ended December 31, 2012
Revenue:
Service revenue
$ 80,000
Expenses:
Salary expense
$ 25,000
Insurance expense
8,000
Advertising expense
3,000
Total expenses
36,000
Net income
$ 44,000
First, we prepare an income statement.

44. Studio Photography, Inc. Statement of Retained Earnings
P1-36A: CONTINUED
Studio Photography, Inc.
Statement of Retained Earnings
Year Ended December 31, 2012
Retained earnings, December 31, 2011
$ 16,000
Add: Net income
44,000
Subtotal
$ 60,000
Less: Dividends
(13,000)
$ 47,000
The, we prepare a statement of retained earnings.

45. Studio Photography, Inc.
P1-36A: CONTINUED
Studio Photography, Inc.
Balance Sheet
December 31, 2012
Assets
Liabilities
Cash
$37,000
Accounts payable
$ 7,000
Accounts receivable
8,000
Note payable
12,000
Equipment
50,000
Total liabilities
19,000
Stockholders’ Equity
Common stock
$29,000
Retained earnings
Total stockholders’ equity
Total assets
$95,000
Total liabilities and stockholders’ equity
47,000
Next, we prepare the balance sheet.
76,000

46. Statement of Retained Earnings
Decision Guidelines
Income Statement
Statement of Retained Earnings
Balance Sheet