1-1 prepared by coby harmon university of california, santa barbara westmont college copyright...

1-3 LO 1 EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS Accounting is an information system Measures business activities Processes data into reports Communicates results to decision makers Is the language of business Copyright 2015 Pearson Education Inc. All rights reserved.

1-4 LO 1 Exhibit 1-1 | The Flow of Accounting Information Companies report their results EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS People make decisions Business transactions occur Copyright 2015 Pearson Education Inc. All rights reserved.

1-5 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Manage personal bank accounts Decide whether to rent or buy Budget monthly income and expenditures Copyright 2015 Pearson Education Inc. All rights reserved.

1-6 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Investors want to know how much they can earn on an investment Creditors want to know when they are going to be paid Copyright 2015 Pearson Education Inc. All rights reserved.

1-7 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Internal Revenue Service (IRS) requires businesses, individuals, and other organizations to pay taxes U.S. Securities and Exchange Commission (SEC) requires public companies to provide financial reports Copyright 2015 Pearson Education Inc. All rights reserved.

1-8 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations File periodic reports with the IRS and state governments Copyright 2015 Pearson Education Inc. All rights reserved.

1-9 LO 1 Financial AccountingManagerial Accounting For decision makers outside the entity investors creditors government agencies the public Information for managers budgets forecasts projections Two Kinds of Accounting Copyright 2015 Pearson Education Inc. All rights reserved.

1-11 Proprietorship Single owner Tend to be small retail stores or solo providers of professional services Proprietor is personally liable for all the businesss debts Business records should not include the proprietors personal finances LO 1 Organizing a Business Copyright 2015 Pearson Education Inc. All rights reserved.

1-12 Partnership Two or more parties as co-owners Income and losses flow through to the partners Many include retail establishments, professional service firms, real estate, and oil and gas exploration companies General partnerships have mutual agency and unlimited liability A limited-liability partnership lessens risk to the partners LO 1 Organizing a Business Copyright 2015 Pearson Education Inc. All rights reserved.

1-13 Limited-Liability Company (LLC) Business (not the owner) is liable for the companys debts May have one owner or many owners, called members Members have limited liability LLCs income flows through to the members, just as if they were partners LO 1 Organizing a Business Copyright 2015 Pearson Education Inc. All rights reserved.

1-14 Corporation A business owned by the stockholders Able to raise large sums of capital from issuance of stock Formed under state law Legally distinct from its owners Stockholders have no personal obligation for the corporations debts LO 1 Organizing a Business continued Copyright 2015 Pearson Education Inc. All rights reserved.

1-15 Corporation Double taxation Corporation pays income tax Shareholders taxed on dividend distributions Stockholders elect the board of directors, which Sets policy Appoints officers LO 1 Organizing a Business Copyright 2015 Pearson Education Inc. All rights reserved.

1-17 LO 2 EXPLAIN AND APPLY UNDERLYING ACCOUNTING CONCEPTS, ASSUMPTIONS, AND PRINCIPLES Accountants follow professional frameworks for measurement and disclosure of financial information. Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) formulates GAAP Copyright 2015 Pearson Education Inc. All rights reserved.

1-18 LO 2 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accountings Objective Exhibit 1-3 | Conceptual Foundations of Accounting Copyright 2015 Pearson Education Inc. All rights reserved.

1-19 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accountings Objective Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 To be relevant, information must Make a difference to the decision maker Help predict or confirm value Be material Copyright 2015 Pearson Education Inc. All rights reserved.

1-20 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accountings Objective Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 To make a faithful representation, the information must Be complete, neutral (free from bias), and free from error Focus on the economic substance of a transaction, event, or circumstance Faithful representation makes the information reliable to users Copyright 2015 Pearson Education Inc. All rights reserved.

1-21 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Comparability: Accounting information capable of being compared with information from other companies in the same period Copyright 2015 Pearson Education Inc. All rights reserved.

1-22 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Verifiability: Information capable of being checked for accuracy, completeness, and reliability Copyright 2015 Pearson Education Inc. All rights reserved.

1-23 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Timeliness: Information made available to users early enough to help them make decisions Copyright 2015 Pearson Education Inc. All rights reserved.

1-24 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Understandability: Information sufficiently transparent so that it makes sense to reasonably informed users of the information Copyright 2015 Pearson Education Inc. All rights reserved.

1-25 Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Cost Constraint: Cost of disclosure should not exceed the expected benefits to users Copyright 2015 Pearson Education Inc. All rights reserved.

1-26 LO 2 Assumptions and Principles Entity Assumption: O rganization stands apart from other organizations and individuals as a separate economic unit Continuity (Going-Concern) Assumption: E ntity will remain in operation for the foreseeable future Historical Cost Principle: A ssets should be recorded at their actual cost Stable-Monetary-Unit Assumption: Effect of inflation is ignored, based on the assumption that the dollars purchasing power is relatively stable Copyright 2015 Pearson Education Inc. All rights reserved.

1-27 LO 2 International Financial Reporting Standards (IFRS) Developed by the IASB Used by many countries around the world Application of GAAP for public companies in the United States is overseen by the U.S. Securities and Exchange Commission (SEC) SEC is studying whether and how to require all U.S. public companies to adopt some version of IFRS Copyright 2015 Pearson Education Inc. All rights reserved.

1-28 LO 2 International Financial Reporting Standards (IFRS) Having a uniform set of high-quality global accounting standards makes financial statements more comparable across borders Most commonly used accounting practices are essentially the same under both U.S. GAAP and IFRS FASB is working hand-in-hand with the IASB toward convergence of standards Copyright 2015 Pearson Education Inc. All rights reserved.

1-30 Assets and Liabilities APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS Financial statements are based on the accounting equation Exhibit 1-4 | The Accounting Equation Copyright 2015 Pearson Education Inc. All rights reserved.

1-31 Assets and Liabilities APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS LO 3 Assets Liabilities Owners Equity Economic resources Expected future benefit Outsider claims Expected future sacrifice Insider claims Stockholders interest in the assets Copyright 2015 Pearson Education Inc. All rights reserved.

1-32 LO 3 AssetsLiabilities Cash and cash equivalents Inventories Property, plant, and equipment Accounts payable Federal and state income taxes payable Long-term debt Current portion of long- term debt Assets and Liabilities What are some of The Gap, Inc.s assets and liabilities? Copyright 2015 Pearson Education Inc. All rights reserved.

1-33 Owners Equity APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS LO 3 AssetsLiabilities Owners Equity The accounting equation can be written as Assets = Liabilities + Stockholders Equity Assets = Liabilities + Paid-in Capital + Retained Earnings Copyright 2015 Pearson Education Inc. All rights reserved.

1-34 Owners Equity LO 3 Assets Liabilities += Paid-in Capital Stockholders Equity Paid-in capital: amount stockholders have invested in the corporation Common Stock Copyright 2015 Pearson Education Inc. All rights reserved.

1-35 Owners Equity LO 3 Assets Liabilities += Paid-in Capital Retained earnings: amount earned and kept for use in the business Common Stock + Retained Earnings Stockholders Equity Copyright 2015 Pearson Education Inc. All rights reserved.

1-36 Owners Equity LO 3 Assets Liabilities += + Paid-in Capital Revenues Stockholders Equity Retained Earnings Revenues: inflows of resources that increase retained earnings by delivering goods or services to customers Copyright 2015 Pearson Education Inc. All rights reserved.

1-37 Owners Equity LO 3 Assets Liabilities += + Paid-in Capital Expenses - Revenues Stockholders Equity Retained Earnings Expenses: resource outflows that decrease retained earnings due to operations Copyright 2015 Pearson Education Inc. All rights reserved.

1-38 Owners Equity LO 3 Assets Liabilities += + Paid-in Capital Expenses - Revenues Stockholders Equity Retained Earnings Dividends: distributions to stockholders (usually cash) generated by net income Dividends - Copyright 2015 Pearson Education Inc. All rights reserved.

1-41 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. Requirements 1.Use these data to write Blue Diamond Corporations accounting equation. 2.How much in resources does Blue Diamond Corporation have to work with? 3.How much does Blue Diamond Corporation owe creditors? 4.How much of the companys assets do the Blue Diamond Corporation stockholders actually own? Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-42 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. What are the companys total resources? Assets Liabilities += Stockholders Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-43 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much in resources does Blue Diamond Corporation have to work with? Assets Liabilities += Stockholders Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-44 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much does Blue Diamond Corporation owe creditors? Assets Liabilities += Stockholders Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-45 $ 1,180 LO 3 Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much of the companys assets do the stockholders actually own? $ 360 600 220 Assets Liabilities += Stockholders Equity $ 770 $ 210 560 $ 410 + = (Amount in millions) Copyright 2015 Pearson Education Inc. All rights reserved.

1-48 LO 4 EVALUATE BUSINESS OPERATIONS THROUGH THE FINANCIAL STATEMENTS Advance slide in presentation mode to reveal financial statement and answer. Exhibit 1-6 Copyright 2015 Pearson Education Inc. All rights reserved.

1-49 LO 4 Income Statement Statement of Retained Earnings Statement of Cash Flows EVALUATE BUSINESS OPERATIONS THROUGH THE FINANCIAL STATEMENTS Data flow from one financial statement to the next Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-50 LO 4 The Income Statement Measures Operating Performance Income Statement Also called statement of operations Reports Revenues and gains Expenses and losses Bottom line of net income or net loss for the period Net Income = Total Revenues and Gains - Total Expenses and Losses Copyright 2015 Pearson Education Inc. All rights reserved.

1-52 LO 4 The Statement of Retained Earnings Shows What a Company Did with Its Net Income Retained Earnings Portion of net income reinvested into the business Net income increases retained earnings Net losses and dividends decrease retained earnings Net income (net loss) flows from the income statement to the statement of retained earnings Corporations not obligated to pay dividends Copyright 2015 Pearson Education Inc. All rights reserved.

1-53 LO 4 Exhibit 1-8 | The Gap, Inc., Consolidated Statements of Retained Earnings The Statement of Retained Earnings Shows What a Company Did with Its Net Income Copyright 2015 Pearson Education Inc. All rights reserved.

1-54 LO 4 The Balance Sheet Measures Financial Position Balance Sheet Also called statement of financial position Reports three items: Assets Liabilities Stockholders equity Dated at the moment in time when the accounting period ends Copyright 2015 Pearson Education Inc. All rights reserved.

1-55 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts and notes receivable Inventory Prepaid expenses Assets on the Balance Sheet Cash is the liquid asset thats the medium of exchange Cash equivalents include money-market accounts or other financial instruments that are easily convertible to cash Copyright 2015 Pearson Education Inc. All rights reserved.

1-56 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts and notes receivable Inventory Prepaid expenses Assets on the Balance Sheet Includes stocks and bonds of other companies that the company intends to sell within the next year Copyright 2015 Pearson Education Inc. All rights reserved.

1-57 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Assets on the Balance Sheet Amounts collectible from customers from the sale of goods and services Copyright 2015 Pearson Education Inc. All rights reserved.

1-58 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Assets on the Balance Sheet Merchandise that a company sells to customers Copyright 2015 Pearson Education Inc. All rights reserved.

1-59 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Assets on the Balance Sheet Amounts paid in advance for costs that include advertising, rent, insurance, and supplies Copyright 2015 Pearson Education Inc. All rights reserved.

1-60 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Assets on the Balance Sheet Tangible assets that include land, buildings, computers, and equipment Copyright 2015 Pearson Education Inc. All rights reserved.

1-61 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Assets on the Balance Sheet Amount of the historical cost of plant assets that has been allocated to expense in the income statement over time as the asset has been used in producing revenue Copyright 2015 Pearson Education Inc. All rights reserved.

1-62 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Assets on the Balance Sheet Includes stocks and bonds of other companies that the company does not intend to sell within the next year Copyright 2015 Pearson Education Inc. All rights reserved.

1-65 LO 4 Current Liabilities Debts payable in the next year or within the businesss operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Liabilities on the Balance Sheet Amounts owed to vendors and suppliers for purchases of inventory Copyright 2015 Pearson Education Inc. All rights reserved.

1-66 LO 4 Current Liabilities Debts payable in the next year or within the businesss operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Liabilities on the Balance Sheet Tax debts owed to the government Copyright 2015 Pearson Education Inc. All rights reserved.

1-67 LO 4 Current Liabilities Debts payable in the next year or within the businesss operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Liabilities on the Balance Sheet Includes other liabilities such as interest payable on borrowed money, accrued liabilities for salaries, utilities, and other expenses that are owed but have not been paid Copyright 2015 Pearson Education Inc. All rights reserved.

1-68 LO 4 Current Liabilities Debts payable in the next year or within the businesss operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Liabilities on the Balance Sheet Portion of long-term liabilities that the company will have to pay off within the next year Copyright 2015 Pearson Education Inc. All rights reserved.

1-69 LO 4 Long-term Liabilities Debts due beyond one year or the companys normal operating cycle if longer than a year Includes Long-term notes payable Bonds payable Liabilities on the Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-71 LO 4 Stockholders Equity Represents the stockholders ownership of the businesss assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Equity on the Balance Sheet Amount represents the par value of the shares issued to stockholders Copyright 2015 Pearson Education Inc. All rights reserved.

1-72 LO 4 Stockholders Equity Represents the stockholders ownership of the businesss assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Amount of cash received on initial sale of the companys stock in excess of the par value Equity on the Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-73 LO 4 Stockholders Equity Represents the stockholders ownership of the businesss assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Portion of net income reinvested into the business Equity on the Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-74 LO 4 Stockholders Equity Represents the stockholders ownership of the businesss assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Amounts paid by the company to repurchase its own stock Equity on the Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-75 LO 4 Stockholders Equity Represents the stockholders ownership of the businesss assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Items of gain or loss that are allowed by the FASB to bypass the income statement and be recorded directly into stockholders equity Equity on the Balance Sheet Copyright 2015 Pearson Education Inc. All rights reserved.

1-77 LO 4 The Statement of Cash Flows Measures Cash Receipts and Payments The Statement of Cash Flows reports three types of activities Operating: Cash flows from selling goods and providing services to customers Investing: Cash flows from the purchase and sale of long-term assets Financing: Borrowing and repayment of borrowed funds Equity transactions, such as issuing stock, paying dividends, and repurchase of company stock Copyright 2015 Pearson Education Inc. All rights reserved.

1-79 a.Income Statement b.Statement of Retained Earnings, Statement of Cash Flows c.Balance Sheet d.Balance Sheet e.Income Statement LO 3 Illustration Assume SB Technology, Inc., is expanding into Australia. Identify the financial statement where decision makers can find the following information about SB Technology, Inc. In some cases, more than one statement will report the needed data. a.Revenue b.Dividends c.Current liabilities d.Total assets e.Selling, general, and administrative expense Financial Statement (s) Copyright 2015 Pearson Education Inc. All rights reserved.

1-80 f.Balance Sheet, Statement of Cash Flows g.Statement of Cash Flows h.Balance Sheet, Statement of Retained Earnings i.Income Statement, Statement of Retained Earnings, Statement of Cash Flows LO 3 Identify the financial statement where decision makers can find the following information about SB Technology, Inc. f.Ending cash balance g.Cash spent to acquire a building h.Ending balance of retained earnings i.Net income Financial Statement (s) Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-81 j.Income Statement k.Balance Sheet l.Balance Sheet m.Balance Sheet n.Statement of Cash Flows LO 3 Identify the financial statement where decision makers can find the following information about SB Technology, Inc. j.Income tax expense k.Common stock l.Income tax payable m.Long-term debt n.Adjustments to reconcile net income to net cash provided by operations Financial Statement (s) Illustration Copyright 2015 Pearson Education Inc. All rights reserved.

1-83 LO 5 CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Income Statement Reports revenues (net sales) and expenses of the year Reports net income or net loss If revenues exceed expenses, there is net income If expenses exceed revenues, there is a net loss Copyright 2015 Pearson Education Inc. All rights reserved.

1-84 LO 5 CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Statement of Retained Earnings Opens with the beginning retained earnings balance Adds net income (or subtracts net loss) Net income comes directly from the income statement Subtracts dividends declared Reports retained earnings balance at end of the year Copyright 2015 Pearson Education Inc. All rights reserved.

1-85 LO 5 CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Balance Sheet Reports assets, liabilities, and stockholders equity at the end of the year Reports that assets equal the sum of liabilities plus stockholders equity Reports retained earnings, which comes from the statement of retained earnings Copyright 2015 Pearson Education Inc. All rights reserved.

1-86 LO 5 CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Statement of Cash Flows Reports cash flows from operating, investing, and financing activities Each category results in net cash provided (an increase) or used (a decrease) Reports whether cash and cash equivalents increased (or decreased) during the year Shows the ending cash and cash equivalents balance Copyright 2015 Pearson Education Inc. All rights reserved.

1-87 LO 5 Exhibit 1-11 | Relationships among the Financial Statements (in millions of $) 1 CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Copyright 2015 Pearson Education Inc. All rights reserved.

1-92 EVALUATE BUSINESS DECISIONS ETHICALLY LO 6 Economics Legal Ethical Decision should maximize the economic benefits Proposition that free societies are governed by laws Recognizes that while certain actions might be both economically profitable and legal, they may still not be right Copyright 2015 Pearson Education Inc. All rights reserved.

1-93 LO 6 Decision 1.What is the issue? 2.Who are the stakeholders, and what are the consequences of the decision to each? 3.Weigh the alternatives. 4.Make the decision and be prepared to deal with the consequences. Copyright 2015 Pearson Education Inc. All rights reserved.

1-94 This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright Copyright 2015 Pearson Education Inc. All rights reserved.

1-1 prepared by coby harmon university of california, santa barbara westmont college copyright...

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