COPYRIGHT © 2011 South-Western/Cengage Learning 1

PowerPoint Author: Catherine Lumbattis

7/e77/e/7/e

What Is Business?

Activities

to provide members of an economic system

with goods and services

LO1

Forms of OrganizationSole Proprietorship

Partnership

Corporation

one owner

two or more owners

entity organized under laws of a particular state

LO2

Nonbusiness Entities

Government Entities Private Organizations

Federal, State, and Local Governments Hospitals, Universities,

Cooperatives

The Nature of Business ActivityFinancingActivities

Investing Activities

OperatingActivities

Examples:

•borrowing •sale of stock

• purchase of assets • sale of products/services

• costs incurred to operate business LO3

What Is Accounting?Identifying

Measuring

Communicating

EconomicInformation

to various

users

LO4

Internal and ExternalUsers of Accounting Information

Internal Users –

Management

CreditorsCurrentand

PotentialOwners

GovernmentAgencies

Suppliers

TradeAssociations

FinancialAnalysts

Bankers

Decisions Made with Financial Information

Invest??

Borrow $$??

Sell stocks or bonds??

Build new plant??

Add new product line??

Start new business??

Loan $$??Extend credit $$??

The Accounting Equation Assets = Liabilities + Owners’

Equity (or Stockholders’ Equity)

Creditors’claims

to assets

Owners’claims

to assets

Economicresources = +

Examples:CashAccounts receivableLand

Accounts payableNotes payable

Capital stockRetained earnings

LO5

Balance Sheet(snapshot of financial position)

AssetsLiabilities

Owners’ Equity (or Stockholders’ Equity)

=+

Current assets:Cash $ 200Accounts receivable 600Land 4,000

Lodge, lifts and equipment 2,500

Total assets $7,300

Top of the World Balance SheetJune 30, 2010

A A = L + SE

Top of the WorldBalance SheetJune 30, 2010

Liabilities:Accounts payable $ 700Salaries and wages payable 400 Notes payable 3,000

Total liabilities $4,100

Liabilities and Stockholders’ Equity

Total Liabilities and Stockholders’ Equity $7,300

= L

A = L + SE

Stockholders’ equity:Capital stock $2,000Retained earnings 1,200

Total stockholders’ equity $3,200

+ SE

Income Statement(for a period of time)

Revenues $$Less: Expenses ($$)Net income $$

Top of the WorldIncome Statement

For the Year Ended June 30, 2010

Revenues:Lift tickets $5,800

Equipment rentals 2,200 Total revenues $8,000 Expenses:

Salaries and wages $2,000 Depreciation 100 Water, gas, and electricity 1,500 Insurance 1,100

Interest 300 Income taxes 1,000 Total expenses 6,000 Net income $2,000

Revenues

Revenues – Expenses = Net Income

Expenses

Net Income

Statement of Retained Earnings(for a period of time)

Beginning retained earnings $$$Add: Net income for the period $$$Deduct: Dividends for the period ($$$)Ending retained earnings $$$

Top of the WorldStatement of Retained Earnings For the Year Ended June 30, 2010Retained earnings, beginning of the year $ 0

Add: Net income for the year 2,000

Deduct: Dividends for the year (800)

Retained earnings, end of the year $ 1,200

Top of the WorldStatement of Cash Flows

For the Year ended June 30, 2010 Cash flows from operating activities:Cash collected from customers $ 7,400Cash payments for: Salaries and wages $ 1,000 Water, gas, and electricity 1,500 Insurance 400 Interest 300 Income taxes 1,000 Total cash payments 4,800Net cash provided by operating activities $ 2,600

Top of the WorldStatement of Cash Flows

For the Year ended June 30, 2010Cash flows from investing activities: Purchase of land $(4,000) Purchase of lodge, lift and equipment (2,600)Net cash flows from investing activities $(6,000)Cash flows from financing activities: Proceeds from issuance of long term note $ 3,000 Proceeds from issuance of capital stock 2,000 Dividends declared and paid (800)Net cash flows from financing activities 4,200Net increase in cash $ 200Cash at beginning of year 0Cash at the end of the year $ 200

Income Statement for Year ended June 30, 2010Revenues $ 8,000Less: Expenses ( 6,000)Net income $ 2,000

Statement of Retained Earnings for Year ended June 30, 2010Beginning balance, retained earnings $ 0Add: Net income 2,000Deduct: Cash dividends (800)Ending balance, retained earnings $ 1,200

Relationship among Financial Statements Top of the World Example

Balance Sheets June 30, 2010 July 1, 2009

Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0

The Conceptual Framework: Foundation for Financial Statements

Aids accountants in their role as interpreters and communicators of relevant information

Acts as a foundation for the specific principles and standards needed by the profession

LO6

Financial Statement Assumptions

EconomicEntity

ConceptCost

Principle

GoingConcern

MonetaryUnit

TimePeriod

Assumption

Economic Entity ConceptEach entity has its own books,

records, and financial statements that are separate from owners

No intermingling of personal and business assets and liabilities or income and expenses

Cost PrincipleRecord assets at cost paid to

acquire them

Continue to value assets at historical cost until sold

More objective than market value

Going Concern

Assume business will continue indefinitely into the future

Justifies use of historical cost

Monetary UnitHow we measure amounts in the

financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.)

Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

Generally Accepted Accounting Principles

The various methods, rules, practices and other procedures that have evolved over time that regulates the preparation of financial statements

Accounting as a Social ScienceAccounting is a service activityAccounting is a social science, not a physical

scienceAccounting principles develop in response to

changing business conditions

The Rules of the Game

GAAP FASB

SEC

AICPA

The rules The rule makers The rule enforcers The CPA regulators

LO7

International Accounting Standards

International Accounting Standards Board was created in 2001

There may be significant differences between U.S. and international standards

Auditing

Financial statements are prepared by

and are the responsibility of the company’s management

External auditors performs tests and procedures to render an opinion as to the financial statements are fairly presented

Ethics in Accounting

1. Identify the ethical dilemma

2. Analyze key elements

3. Determine the alternatives

4. Resolve by selecting ethical alternative

LO8

The Changing Face of the Accounting Profession

A “financial reporting crisis” caused by:

Enron: the omission of entities from the financial statements WorldCom: treating costs as assets rather

than expenses causing higher net income

Sarbanes-Oxley ActProvisions of the act: Established the Public Company Accounting

Oversight Board Required external auditors to report directly to

the company’s audit committee Prohibits external auditors from providing other

services compromising independence

End of Chapter 1