Chapter 1Chapter 1

Accounting and Accounting and BusinessBusiness

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

1-2

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

Products, pricing, promotion, distributionProducts, pricing, promotion, distribution• Human resourcesHuman resources

Jobs, people, salaries, benefitsJobs, people, salaries, benefits• Production and operationsProduction and operations

Planning, directing, controlling, evaluatingPlanning, directing, controlling, evaluating• FinanceFinance

Capital maintenanceCapital maintenance• Accounting and information systemsAccounting and information systems

Information infrastructureInformation infrastructure

1-3

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

• MarketingMarketing Pricing, distribution costsPricing, distribution costs

• Human resourcesHuman resources Pay and fringe benefits, hiring costsPay and fringe benefits, hiring costs

• Production and operationsProduction and operations Production costs—actual and budgetedProduction costs—actual and budgeted

• FinanceFinance Cost of borrowing, benefits expectedCost of borrowing, benefits expected

1-4

How has Business Evolved?How has Business Evolved?

• Sole proprietorshipSole proprietorship One ownerOne owner

• PartnershipPartnership Two or more ownersTwo or more owners

• CorporationCorporation Many ownersMany owners

• MerchandisingMerchandising Buy and sell productsBuy and sell products

• ServiceService Provide serviceProvide service

• ManufacturingManufacturing Make and sell Make and sell

productsproducts

1-5

How has Accounting Evolved?How has Accounting Evolved?

• Determination of wealthDetermination of wealth What am I worth todayWhat am I worth today

• Determination of incomeDetermination of income How has my wealth changedHow has my wealth changed

• On-going successOn-going success How is the business doingHow is the business doing

1-6

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

• Customer-focused operationsCustomer-focused operations

• Global marketsGlobal markets Products, labor, and capitalProducts, labor, and capital

• Advanced manufacturing and Advanced manufacturing and communicationscommunications

• eBusinesseBusiness B2B and B2CB2B and B2C

• Hybrid organizational structuresHybrid organizational structures

1-7

What are the Basic Concepts of Accounting?What are the Basic Concepts of Accounting?• Business entityBusiness entity

Keep business and personal records separateKeep business and personal records separate

• Monetary unitMonetary unit Maintain business records in currencyMaintain business records in currency

• Going concernGoing concern Business will continue past the current periodBusiness will continue past the current period

• PeriodicityPeriodicity Profits/losses must be determined periodicallyProfits/losses must be determined periodically

1-8

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

• AssetAsset Right to use resources with future benefitRight to use resources with future benefit

• LiabilityLiability Obligation to transfer resources in the future to Obligation to transfer resources in the future to

suppliers of goods and servicessuppliers of goods and services

• Owners’ equityOwners’ equity Net assets belong to ownersNet assets belong to owners

• Revenues (accrual basis)Revenues (accrual basis) Amounts earned from providing goods and servicesAmounts earned from providing goods and services

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

1-9

What is GAAP and the IFRS?What is GAAP and the IFRS?

• Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

• International Financial Reporting standardsInternational Financial Reporting standards

• Financial Accounting Standards BoardFinancial Accounting Standards Board Current rule-making body in U.S.Current rule-making body in U.S.

• International Accounting Standards BoardInternational Accounting Standards Board Current rule-making body internationallyCurrent rule-making body internationally

1-10

What are the Concepts Statements?What are the Concepts Statements?• Concepts Statement #1Concepts Statement #1

Useful information for decision makingUseful information for decision making• Concepts Statement #2Concepts Statement #2

Characteristics of accounting informationCharacteristics of accounting information• Concepts Statement #3Concepts Statement #3 (superceded) (superceded)• Concepts Statement #4Concepts Statement #4

Objectives for nonbusiness organizationsObjectives for nonbusiness organizations• Concepts Statement #5Concepts Statement #5

Financial statementsFinancial statements• Concepts Statement #6Concepts Statement #6

Elements of financial statementsElements of financial statements• Concepts Statement #7Concepts Statement #7

Estimating value of future cash flowsEstimating value of future cash flows

1-11

What Makes Information Useful?What Makes Information Useful?

• RelevanceRelevance Capable of making a differenceCapable of making a difference

• ReliabilityReliability DependableDependable

• Benefits > CostsBenefits > Costs Benefits derived must be greater than costBenefits derived must be greater than cost

• MaterialityMateriality Large enough to have an impact on a Large enough to have an impact on a

decisiondecision

1-12

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

• Income statementIncome statement Indicates revenues less expenses = net Indicates revenues less expenses = net

income for a income for a period of timeperiod of time

• Statement of cash flowsStatement of cash flows Indicates cash inflows and outflows from Indicates cash inflows and outflows from

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

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

period of timeperiod of time

1-13

Financial Statements ContinuedFinancial Statements Continued

• Balance sheetBalance sheet Indicates the ending balances of assets, Indicates the ending balances of assets,

liabilities, and owners’ equity at a liabilities, and owners’ equity at a point in point in timetime

• Auditor’s reportAuditor’s report Indicates whether the company followed Indicates whether the company followed

GAAP when preparing its financial statementsGAAP when preparing its financial statements

1-14

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

• Current ratioCurrent ratio Relationship between current assets and Relationship between current assets and

current liabilitiescurrent liabilities

• Debt to equity ratioDebt to equity ratio Relationship between liabilities and owners’ Relationship between liabilities and owners’

equityequity

• Return on salesReturn on sales Relationship between net income and salesRelationship between net income and sales