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Chapter 01
Accounting Information and Decision Making
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Part A
Accounting as a Measurement/Communication
Process
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LO1 Basic Understanding of Accounting
Make Decisions About
Communicate information to:
Activities Measured by:
People Companies
Accountants
Accounting – The language of businessAccounting – The language of business
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Managerial Accounting
deals with the methods accountants use to
provide information to an organization’s internal users; that is, its own
managers.
Managerial Accounting
deals with the methods accountants use to
provide information to an organization’s internal users; that is, its own
managers.
Financial Accounting
measures business activities of a company
and communicates those measurements to
external parties for decision-making
purposes.
Financial Accounting
measures business activities of a company
and communicates those measurements to
external parties for decision-making
purposes.
Focus of the Course
Accounting Categories
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LO2 Business Activities to Measure
Financing activitiesFinancing activities Investing activitiesInvesting activities
Operating activitiesOperating activities
Business ActivitiesInvolves
funding from external sources
Involves funding from
external sources
Involves purchase and sale of long-
term resources
Involves purchase and sale of long-
term resources
Involves transactions in
primary operations of
business
Involves transactions in
primary operations of
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Assets Liabilities Stockholders’ Equity= +
Investors and Creditors would like to know aboutInvestors and Creditors would like to know about
Company’s resources
Claims to those resources
Basic Accounting Equation
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Profitability
Revenue > ExpensesRevenue > Expenses
Net Income
Revenue < ExpensesRevenue < Expenses
Net Loss
DividendsDividendsCompany distributes
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Owned by a single person
Legally separate from its owners
Owned by two or more persons
Forms of Business Organizations
Sole ProprietorshipSole Proprietorship PartnershipPartnership
CorporationCorporation
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LO3 Communicating Through Financial Statements
Financial statements are periodic reports published by the company for the purpose of providing information to
external users.
Financial statements are periodic reports published by the company for the purpose of providing information to
external users.
Statement of Stockholders’ EquityIncome Statement
Statement of Cash FlowsBalance Sheet
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Income Statement
Financial statement that reports the
company’s revenues and expenses over an interval of time
Financial statement that reports the
company’s revenues and expenses over an interval of time
Shows whether the company was able to
generate enough revenue to cover the expenses of running
the business
Shows whether the company was able to
generate enough revenue to cover the expenses of running
the business
If Revenues > Expenses
then Net IncomeIf
Revenues < Expensesthen Net Loss
If Revenues > Expenses
then Net IncomeIf
Revenues < Expensesthen Net Loss
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Income Statement for Eagle Golf Academy
Revenues:Service revenue $6,360
Expenses:Salaries expense 3,100Rent expense 500Supplies expense 800Interest expense 100Utilities expense 960Other expense 400
Total expenses 5,860Net income $500
EAGLE GOLF ACADEMYIncome Statement
For the month ended January 31
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Statement of Stockholders’ Equity
Financial statement that summarizes the changes in stockholders’ equity over an
interval of time.
Financial statement that summarizes the changes in stockholders’ equity over an
interval of time.
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Statement of Stockholders’ Equity for Eagle Golf Academy
TotalCommon Retained Stockholders’
Stock Earnings Equity
Beginning balance (Jan. 1) -0- -0- -0-Issuance of common stock $25,000 $25,000
Add: Net income for January $500 $500 Less: Dividends (200) (200)Ending balance (Jan. 31) $25,000 $300 $25,300
EAGLE GOLF ACADEMYStatement of Stockholders’ EquityFor the month ended January 31
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Balance Sheet
Financial statement that presents the financial position of the company on a particular date
Financial statement that presents the financial position of the company on a particular date
Summarized by the basic accounting equation:Assets = Liabilities + Stockholders’ Equity
Summarized by the basic accounting equation:Assets = Liabilities + Stockholders’ Equity
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Balance Sheet for Eagle Golf Academy
Cash $6,200 Accounts payable $2,300 Accounts receivable 2,700 Salaries payable 300Supplies 1,500 Interest payable 100Equipment, net 23,600 Utilities payable 960Other assets 5,500 Notes payable 10,000
Other liabilities 540Total liabilities 14,200
Common stock 25,000Retained earnings 300
Total stockholders’ equity 25,300
Total assets $39,500 Total liabilities and stockholders’ equity $39,500
Stockholders’ Equity
EAGLE GOLF ACADEMY
January 31Balance Sheet
Assets Liabilities
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Statement of Cash Flows
Financial statement that measures activities involving cash receipts and cash payments
over an interval of time.
Financial statement that measures activities involving cash receipts and cash payments
over an interval of time.
Can be classified into three categoriesCan be classified into three categories
Operating cash flowsOperating cash flows Investing cash flowsInvesting cash flows Financing cash flowsFinancing cash flows
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Statement of Cash Flows for Eagle Golf Academy
Cash inflows:From customers $4,200
Cash outflows:For salaries (2800)For rent (6000)
Net cash flows from operating activities ($4,600)
Purchase equipment (24000)Net cash flows from investing activities (24,000)
Issue common stock 25,000Borrow from bank 10,000Pay dividends (200)
Net cash flows from financing activities 34,800Net increase in cash 6,200Cash at the beginning of the month -0-Cash at the end of the month $6,200
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Cash Flows from Operating Activities
EAGLE GOLF ACADEMYStatement of Cash Flows
For the month ended January 31
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Link among Financial Statements
EAGLE GOLF ACADEMY
Income Statement
Revenues $6,360
Expenses 5,860
Net income $ 500
EAGLE GOLF ACADEMY
Statement of Cash Flows
Cash Flows from Operating Activities ($4,600)
Cash Flows from Investing Activities (24,000)
Cash Flows from Financing Activities 34,800
Net increase in cash 6,200
Cash at the beginning of the year 0
Cash at the end of the year $6,200
EAGLE GOLF ACADEMYStatement of Stockholders’ Equity
CommonStock
RetainedEarnings
TotalStockholders’
Equity
Beginning balance (Jan. 1) -0- -0- -0-
Issuances $25,000 $25,000
Add: Net income 500 500
Less: Dividends (200) (200)
Ending balance (Jan. 31) $25,000 $300 $25,300
EAGLE GOLF ACADEMY
Balance Sheet
Cash $ 6,200 Liabilities $ 14,200
Other assets 33,300 Stockholders’ equity
25,300
Total liabilities and stockholders’ equity $39,500
Total assets $39,500
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Part B
Financial Accounting Information
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LO4 Importance of Financial Accounting
Option A
Option B
Financial Accounting Information
Investors and creditors
InvestmentChoices
?
Financial accounting information is essential to making good business decisions
Financial accounting information is essential to making good business decisions
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* Amounts in this chart represent the investment growth based on the median stock return of each group each year. Companies included in this analysis are all U.S. companies with listed stocks, which averages about 6,000 companies per year.
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LO5 Rules of Financial Accounting
Investors & Creditors
Financial Accounting Information
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP)
make their decisions based on
Should be based on formal standards
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Current Standard Setting
United States Globally
Financial Accounting Standards Board (FASB)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB) International Accounting Standards Board (IASB)
Governed by
Securities and Exchange Commission (SEC)
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Role of Auditors
Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial
statements.
Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial
statements.
Role of auditors
Help ensure that management has in fact
appropriately applied GAAP in preparing the company’s
financial statements
Help investors and creditors in their decisions by adding credibility to the
financial statements.
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Objectives of Financial Accounting
Financial accounting should provide information that:
• is useful to investors and creditors in making decisions.
• helps to predict cash flow. • tells about economic resources, claims to
resources, and changes in resources and claims.
Financial accounting should provide information that:
• is useful to investors and creditors in making decisions.
• helps to predict cash flow. • tells about economic resources, claims to
resources, and changes in resources and claims.
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An Ethical Foundation
Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior.
Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior.
Poor Business Ethics led to the collapse
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Sarbanes-Oxley Act (SOX)
This act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses
conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.
This act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses
conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.
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Part C
Careers in Accounting
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LO6 Careers in Accounting
Financial accountants Managerial accountants
Budget analystsInternal auditorsTax preparers
Payroll managers
AuditorsTax preparers/plannersBusiness consultants
Traditional roles:
Your employerCorporationsGovernments
Nonprofit organizationsIndividuals
Clients:
(Big 4 and Non-Big 4)
Private AccountingPublic Accounting
Financial accountants Managerial accountants
Budget analystsInternal auditorsTax preparers
Payroll managers
AuditorsTax preparers/plannersBusiness consultants
Traditional roles:
Your employerCorporationsGovernments
Nonprofit organizationsIndividuals
Clients:
(Big 4 and Non-Big 4)
Private AccountingPublic Accounting
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Careers in Accounting (cont.)
Other career options: Governmental accounting, sole proprietorship, and education.
Information managersManagement advisors
Tax plannersAcquisition specialists
FBI agentsSports agents
Financial plannersInfo. tech. developers
Financial analystsForensic accountants
Information risk managers
Investment bankersEnvironmental accountants
Financial advisorsTax lawyers
Expanding roles:
Other career options: Governmental accounting, sole proprietorship, and education.
Information managersManagement advisors
Tax plannersAcquisition specialists
FBI agentsSports agents
Financial plannersInfo. tech. developers
Financial analystsForensic accountants
Information risk managers
Investment bankersEnvironmental accountants
Financial advisorsTax lawyers
Expanding roles:
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LO7 Conceptual Framework
Appendix
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Qualitative Characteristics
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Assumptions for GAAP
Identify all economic events with a particular economic
entity
Identify all economic events with a particular economic
entityNeed a unit or scale of
measurement
Need a unit or scale of measurement
Provide information of an enterprise at regular time
periods
Provide information of an enterprise at regular time
periods Business entity will continue
to operate indefinitely
Business entity will continue to operate indefinitely
Economic Entity Assumption
Economic Entity Assumption
Monetary Unit Assumption
Monetary Unit Assumption
Periodicity Assumption Periodicity
Assumption Going Concern
Assumption Going Concern
Assumption
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End of Chapter 01
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