chapter 1 accounting and the business environment
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Chapter 1 Accounting and The Business Environment. Decision Makers. Two Fields of Accounting. Financial Accounting. Managerial Accounting. Focuses on information for internal decision makers Managers Business Owners Employees. Provides information for external decision makers Investors - PowerPoint PPT PresentationTRANSCRIPT
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 1 of 23
Chapter 1
Accounting and The Business Environment
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 2 of 23
Decision Makers
Individuals Businesses
Creditors Investors
Taxing Authorities
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 3 of 23
Two Fields of AccountingFinancial AccountingProvides information for external decision makers
– Investors– Creditors– Taxing Authorities
Managerial AccountingFocuses on information for internal decision makers
ManagersBusiness OwnersEmployees
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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:1.Is the banker considered an internal or external user of financial information?
2.Which financial statement would provide the best information to answer the banker’s questions?
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The Accounting Profession• Lucrative career with many opportunities• Certified Public Accountants (CPAs)
Certified Public Accountants, or CPAs
Certified Management
Accountants, or CMAs
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 6 of 23
Governing OrganizationsFASB
SEC
AICPA
GAAP
IASB
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 7 of 23
Ethics in Accounting and Business
Investors and creditors want reliable financial information
Companies want to attract investors
Conflict of Interest
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 8 of 23
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
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 9 of 23
Standards of Professional Conduct
AICPA IMA
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 10 of 23
Types of Business Organizations
Proprietorship Partnership
Corporation LLC and LLP
Not-for-profit
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 11 of 23
Comparison of Business FormsProprietorship 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 Indefinite 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 liabilityof board members
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 12 of 23
Corporate CharacteristicsSeparate Legal Entity
Continuous Life/Transferability of Ownership
No Mutual Agency
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 13 of 23
Corporate Characteristics(continued)
Limited Liability of Stockholders
Separation of Ownership and Management
Government Regulation
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 14 of 23
Corporate Characteristics(continued)
Corporate Taxation
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Organization of a Corporation• Incorporators obtain charter from the state• Charter authorizes corporation to:
Issue stockConduct business in accordance with state law
• Incorporators agreed to a set of bylaws• Corporations begins to exist when stock is
issued
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Structure of a Corporation
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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?
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GAAP• Generally Accepted Accounting Principles
Guidelines that govern accountingBased on a conceptual framework
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Accounting Principles
Entity Concept
Faithful Representation
Principle
CostPrinciple
Going- Concern Concept
Stable Monetary Unit
Concept
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Accounting PrinciplesEntity Concept
Faithful Representation Principle
Cost Principle
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 21 of 23
Accounting Principles(continued)
Going-Concern
Stable Monetary Unit Concept
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The Accounting Equation
ASSETS LIABILITIES EQUITY
EconomicResources
Claims to EconomicResources
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 23 of 23
Assets• Economic resources • Benefit the business in the future
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 24 of 23
Claims to AssetsLiabilities• Debts payable to
outsiders
Equity• Owners’ claims to the
assets of the business
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The Accounting Equation
AssetsLiabilities
Equity
Assets Liabilities Equity
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Equity of a Corporation
Assets Liabilities Stockholders’equity
Paid-in capital
Retained earnings
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 27 of 23
Equity of a Corporation
Stockholders’ equity
Paid-in capital Common stock
Retained earnings
+ Net income(loss)
- Dividends
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 28 of 23
Net Income
Retained earnings
+ Net income(loss)
- Dividends
+ Revenues
- Expenses
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 29 of 23
Revenues• Amounts earned by delivering goods or
services to customersSales revenueService revenueInterest revenueDividend revenue
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 30 of 23
Expenses• Outflows of assets or increasing liabilities in
the course of delivering goods or services to customers
Store or rent expenseSalary expenseAdvertising expenseUtilities expenseInterest expenseProperty tax expense
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 31 of 23
E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE
ACCOUNTING EQUATIONSelect financial information for three corporations follows:
Requirements:1. Compute the missing amount in the accounting equation for each entity.
Assets Liabilities EquityNew Rock Gas $24,000 $50,000DJ Video Rentals $75,000 $32,000Corner Grocery $100,000 $53,000
$ ?
$ ?$ ?
$74,000
$43,000$47,000
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E1-16: CONTINUED2. 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 transferabilityCorporate taxation
Government regulationLimited Liability of Stockholders
No Mutual AgencySeparate Legal Entity
Separation of ownership and managers
Going Concern Concept
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 33 of 23
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
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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:1. 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 $
55,000
Bal $ 55,000 $ 0 $ 0 $ 0 $ 55,000 $ 0
9 (46,000) 46,000
Bal $9,000 $ 0 $46,000 $ 0 $55,000 $ 0
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 35 of 23
E1-21: CONTINUEDAssets Liabilities Stockholders’
Equity
Date Cash Medical supplies Land Accounts
payableCommon stock
Retained earnings
Jul 12 $1,800 $1,800
Bal $9,000 $1,800 $46,000 $1,800 $55,000 $0
15
Bal $9,000 $1,800 $46,000 $1,800 $55,000 $0
15-31 8,000 8,000
Bal $17,000 $1,800 $46,000 $1,800 $55,000 $8,000
29(1,600)
(900)(100)
(1,600)(900)(100)
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 36 of 23
E1-21: CONTINUED
Assets Liabilities Stockholders’ Equity
Date Cash Medical supplies Land Accounts
payableCommon stock
Retained earnings
Bal $14,400 $1,800 $46,000 $1,800 $55,000 $5,400
30 (700) (700)
Bal $14,400 $1,100 $46,000 $1,100 $55,000 $5,400
31 (1,100) (1,100)
Bal $13,300 $1,100 $46,000 $ 0 $55,000 $5,400
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 37 of 23
Preparing the Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 38 of 23
Income Statement
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 39 of 23
Statement of Retained Earnings
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Balance Sheet
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 41 of 23
Statement of Cash Flows
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 42 of 23
P1-36A: PREPARING FINANCIAL STATEMENTS
42
Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, 2011. 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 statementb. Statement of retained earningsc. Balance sheet
Insurance expense $ 8,000 Accounts receivable $ 8,000Cash 37,000 Note payable 12,000Accounts payable 7,000 Retained earnings 47,000 Advertising expense 3,000 Salary expense 25,000Service revenue 80,000 Equipment 50,000Dividends 31,000 Common stock 29,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 43 of 23
P1-36A: CONTINUED
43
Studio Photography, Inc.Income Statement
Year Ended December 31, 2012
Revenue: Service revenue $ 80,000Expenses: Salary expense $ 25,000 Insurance expense 8,000 Advertising expense 3,000
Total expenses 36,000Net income $ 44,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 44 of 2344
Studio Photography, Inc.Statement of Retained EarningsYear Ended December 31, 2012
P1-36A: CONTINUED
Retained earnings, December 31, 2011 $ 16,000 Add: Net income 44,000 Subtotal $ 60,000 Less: Dividends (13,000)Retained earnings, December 31, 2011 $ 47,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 45 of 2345
Studio Photography, Inc.Balance Sheet
December 31, 2012
P1-36A: CONTINUED
Assets LiabilitiesCash $37,000 Accounts payable $ 7,000Accounts receivable 8,000 Note payable 12,000Equipment 50,000 Total liabilities 19,000
Stockholders’ EquityCommon stock $29,000Retained earningsTotal stockholders’ equity
Total assets $95,000 Total liabilities and stockholders’ equity $95,000
47,000
76,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson Slide 46 of 23
Decision Guidelines
Income Statement
Statement of Retained Earnings
Balance Sheet