1. Accounting as a Form of Communication
Chapter 1
Accounting as a Form of Communication
Using Financial Accounting Information:
The Alternative to Debits and Credits, 6/e by
Gary A. Porter and Curtis L. Norton
Copyright © 2009 South-Western, a part of Cengage Learning.

2. What Is Business? Activities to provide members of an economic system
with goods and services
Activities
LO1

3. Forms of Organization two or more owners one owner
Sole Proprietorship
two or more owners
Partnership
entity organized under laws of a particular state
Corporation
LO2

4. Hospitals, Universities,
Nonbusiness Entities
Government entities
Private organizations
Federal, State, and
Local Governments
Hospitals, Universities,
Cooperatives

5. The Nature of Business Activity
Financing
Activities
Investing
Activities
Operating
Activities
Examples:
borrowing
sale of stock
purchase of assets
sale of products/services
costs incurred to operate business
LO3

6. What Is Accounting? Identifying Economic to Information various
users
Measuring
Communicating
LO4

7. Internal and External Users of Accounting Information
Creditors
Current
and
Potential
Owners
Government
Agencies
Suppliers
Trade
Associations
Financial
Analysts
Bankers
Internal
Users –
Management 12 12

8. Decisions Made with Financial Information
Add new
product line??
Invest??
Borrow $$??
Build new plant??
Extend credit $$??
Loan $$??
Start new business??
Sell stocks or bonds?? 2 2

9. The Accounting Equation
Assets = Liabilities + Owners’ Equity
(or Stockholders’ Equity)
Creditors’
claims
to assets
Owners’
Economic
resources = +
Accounts payable
Notes payable
Capital stock
Retained earnings
Examples:
Cash
Accounts receivable
Land
LO5 14 14

10. Balance Sheet (snapshot of financial position)=
Liabilities
Assets +
Owners’ Equity
(or Stockholders’ Equity) 15 15

11. Top of the World Balance Sheet June 30, 2008
A = L + SE A
Current assets:
Cash $ 200
Accounts receivable
Land ,000
Lodge, lifts and equipment ,500
Total assets $7,300

12. Top of the World Balance Sheet June 30, 2008
A = L + SE
Top of the World Balance Sheet June 30, 2008
Liabilities and Stockholders’ Equity
= L
Liabilities:
Accounts payable $
Salaries and wages payable 400
Notes payable 3,000
Total liabilities $4,100
+ SE
Stockholders’ equity:
Capital stock $2,000
Retained earnings ,200
Total stockholders’ equity $3,200
Total Liabilities and Stockholders’ Equity $ 7,300

13. Income Statement (for a period of time)
Revenues $$
Less: Expenses ($$)
Net income $$ 16 16

14. Top of the World Income Statement For the Year Ended June 30, 2008
Revenues – Expenses = Net Income
Revenues:
Lift tickets $5,800
Equipment rentals ,200
Total revenues $8,000
Expenses:
Salaries and wages $2,000
Depreciation
Water, gas, and electricity ,500
Insurance 1,100
Interest
Income taxes ,000
Total expenses ,000
Net income $2,000
Revenues
Expenses
Net Income

15. Statement of Retained Earnings (for a period of time)
Beginning retained earnings $$$
Add: Net income for the period $$$
Deduct: Dividends for the period ($$$)
Ending retained earnings $$$ 17 17

16. Top of the World Statement of Retained Earnings For the Year Ended June 30, 2008
Retained earnings, beginning of the year $
Add: Net income for the year ,000
Deduct: Dividends for the year (800)
Retained earnings, end of the year $ 1,200

17. Top of the World Statement of Cash Flows For the Year Ended June 30, 2008
Cash flows from operating activities:
Cash collected from customers $ 7,400
Cash payments for:
Salaries and wages $ 1,000
Water, gas, and electricity 1,500
Insurance
Interest
Income taxes ,000
Total cash payments ,800
Net cash provided by operating activities $ 2,600

18. Top of the World Statement of Cash Flows For the Year ended June 30, 2008
Cash flows from investing activities:
Purchase of land $(4,000)
Purchase of lodge, lift and equipment (2,600)
Net cash flows from investing activities $(6,000)
Cash flows from financing activities:
Proceeds from issuance of long term note $ 3,000
Proceeds from issuance of capital stock 2,000
Dividends declared and paid (800)
Net cash flows from financing activities ,200
Net increase in cash $ 200
Cash at beginning of year
Cash at the end of the year $ 200

19. Relationship among Financial Statements Top of the World Example
Income Statement for 2008
Revenues $ 8,000
Less: Expenses ( 6,000)
Net income $ 2,000
Statement of Retained Earnings for 2008
Beginning balance, retained earnings $
Add: Net income ,000
Deduct: Cash dividends (800)
Ending balance, retained earnings $ 1,200
Balance Sheets
Total assets $7, $
Liabilities ,
Capital stock ,
Retained earnings ,
Total liabilities and stockholders’ equity $7, $

20. Financial Statement Assumptions
Economic
Entity
Concept
Cost
Principle
Going
Concern
Monetary
Unit
Time
Period
Assumption
LO6 20 20

21. Economic Entity Concept
Each entity has its own books, records, and financial statements that are separate from owners.
No intermingling of personal and business assets and liabilities or income and expenses. 21 21

22. Cost Principle Record assets at cost paid to acquire them.
Continue to value assets at historical cost until sold.
More objective than market value. 22 22

23. Going Concern
Assume business will continue indefinitely into the future
Justifies use of historical cost 23 23

24. Monetary Unit
How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.)
Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

25. Time Period Assumption
Assumes it is possible to break up an entity’s earnings in discrete time periods
(a month, quarter, year)
Necessary to provide users with financial results on a timely basis
Requires use of estimates 25 25

26. The Rules of the Game The rules The rule makers The rule enforcers
The CPA regulators
GAAP
FASB
SEC
AICPA
LO7 26 26

27. Ethics in Accounting 1. Identification of ethical dilemma
2. Analysis of key elements
3. Determine the alternatives
4. Resolve by selecting ethical alternative
LO8

28. The Changing Face of the Accounting Profession
A “financial reporting crisis” caused by:
Enron: the omission of entities from the
financial statements
WorldCom: treating costs as assets rather than expenses causing higher net income

29. Sarbanes-Oxley Act Provisions of the act:
Established the Public Company Accounting Oversight Board
Required external auditors to report directly to the company’s audit committee
Prohibits external auditors from providing other services compromising independence

30. End of Chapter 1