McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1Chapter 1

Accounting and Business

1-2

What are the Basic Functions of Business?What are the Basic Functions of Business?

• Marketing

• Human resources

• Production and operations

• Finance

• Accounting and information systems

(In Teams determine the functions of each of these and then how they use accounting information—page 3.)

1-3

How do the Functions Use Accounting Information?How do the Functions Use Accounting Information?

• Marketing Pricing, distribution costs

• Human resources Pay and fringe benefits, hiring costs

• Production and operations Production costs—actual and budgeted

• Finance Cost of borrowing, benefits expected from

using the money

1-4

How has Business Evolved?How has Business Evolved?

• Sole proprietorship One owner

• Partnership Two or more owners

• Corporation Many owners

• Merchandising Buy and sell products

• Service Provide service

• Manufacturing Make and sell products

What is Apple?

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How has Accounting Evolved?How has Accounting Evolved?

• Determination of wealth What am I worth today

• Determination of income How has my wealth changed

• On-going success How is the business doing

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Trivia Question +1Trivia Question +1

Al Capone, the infamous Chicago mobster, was actually brought to justice not for murder, but for what? +1

Tax EvasionElmer Irey, a forensic accountant caught him! He put together enough evidence from Capone’s bank statements and other financial records to indict him on income tax evasion for which he was subsequently sentenced to prison.

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What are the Characteristics of Business Today?What are the Characteristics of Business Today?

• Customer-focused operations

• Global markets

• Manufacturing and Communications Advances

• eBusiness

• Hybrid organizational structures

1-8

What are the Basic Concepts of Accounting?What are the Basic Concepts of Accounting?

• Business entity Keep business and personal records separate

• Monetary unit Maintain business records in currency

• Going concern Business will continue past the current period

• Periodicity Profits/losses must be determined periodically

Cash vs. Accrual AccountingCash vs. Accrual Accounting

• Cash basis accounting Income is measured as the difference between

cash received from customers and the cash paid to employees and other suppliers of goods and services

• Accrual basis accounting Income is measured as the difference between

sales (revenues) earned and the expenses incurred during the period, regardless of when cash is paid or received

1-10

What are the 5 Basic Elements of Accounting?What are the 5 Basic Elements of Accounting?

• Asset Right to use resources with future benefit

• Liability Obligation to transfer resources in the future to

suppliers of goods and services

• Owners’ equity Net assets belong to owners

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5 Basic Elements Continued5 Basic Elements Continued

• Revenues (accrual basis) Amounts earned from providing goods

and services

• Expenses (accrual basis) Amounts incurred in an attempt to

generate revenues

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What is __________?What is __________?

• Generally accepted accounting principles

• Financial Accounting Standards Board Current rule-making body Pronouncements – Statements of Financial

Accounting Standards Statements of Financial Accounting Concepts

GAAP

1-13

What are the Concepts Statements?What are the Concepts Statements?

• Concepts Statement #1 Useful information for decision making

• Concepts Statement #2 Characteristics of accounting information

(benefits>costs; materiality, understandability, usefulness)

• Concepts Statement #3 (superceded)

• Concepts Statement #4 Objectives for non-business organizations

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Concepts ContinuedConcepts Continued

• Concepts Statement #5 What information should be presented in

financial statements and when that information should be presented

• Concepts Statement #6 Elements of financial statements

• Concepts Statement #7 Estimating value of future cash flows

1-15

What Makes Information Useful?What Makes Information Useful?

• Relevance Capable of making a difference in a decision

• Reliability Dependable, must be verifiable, not biased

• Benefits > Costs Benefits derived must be greater than cost

• Materiality Large enough to have an impact on a decision

1-16

What are the 4 Basic Financial Statements and Auditors’ Report?What are the 4 Basic Financial Statements and Auditors’ Report?

• Income statement Indicates revenues less expenses = net income

for a period of time

• Statement of cash flows Indicates cash inflows and outflows from

operating, investing, and financing activities for a period of time

• Statement of owners’ equity Indicates changes in owners’ equity for a period

of time

1-17

Financial Statements ContinuedFinancial Statements Continued

• Balance sheet Indicates the ending balances of assets,

liabilities, and owners’ equity at a point in time

• Auditor’s report Indicates whether the company followed GAAP

when preparing its financial statements

1-18

What are the Purposes of the Ratios?What are the Purposes of the Ratios?

• Current Ratio Current Assets/Current LiabilitiesRelationship between current

assets and current liabilities

1-19

What are the Purposes of the Ratios?What are the Purposes of the Ratios?

• Debt to Equity Ratio Total Debt/Total Shareholders’

Equity

Relationship between liabilities and owners’ equity; measure of company solvency (ability to pay both short- and long-term obligations)

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What are the Purposes of the Ratios?What are the Purposes of the Ratios?

• Return on SalesNet Income/SalesRelationship between net income and sales; measure of profitability (ability to generate profit from sales)

Lecture ExamplesLecture Examples

1. A company provided $120,000 of services during the year. They received $100,000 from customers. The company’s employees earned $70,000 in wages, but due to the way payroll is determined (monthly), the employees were only paid $55,000. What is the cash-basis income? What is the accrual-basis income?

Answer:

Cash basis income:

Accrual basis income:

Lecture ExamplesLecture Examples

2.Describe each of the following items and determine which financial statement it appears on. Accounts payable, $136 Building, $809

Accounts receivable, $876 Patent, $2

Cash received from customers, $13,074 Long-term bank loan, $716

Cash paid for inventory, $8,338 Common stock, $3,827

Cash paid to employees, $1,724 Retained earnings, $373

Cost of goods sold, $8,192 Cash balance, $2,211

Inventory, $908 Miscellaneous payables, $529

Miscellaneous operating expenses, $3,686

Sales, $13,353

Wage expense, $1,750

Lecture ExamplesLecture Examples

3.Using the amounts shown in Lecture Example #2, calculate the current ratio, the debt to equity ratio, and the return on sales ratio.

Answer:

Current ratio:

Debt to equity ratio:

Return on sales ratio: