Accounting and the Business Environment Chapter 1 1-1Copyright ©2014 Pearson Education, Inc....

Accounting and the Business

Environment

Chapter 1

1-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Why Is Accounting Important?

Accounting is the information system that

measures business activities, processes the information into

reports, and communicates the results to decision

makers.

1-2

Financial Accounting

Managerial Accounting

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Users of Accounting Info (Decision Makers

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-3

Individuals Businesses Owners/Managers

Creditors Investors

Taxing Authorities

Users of Financial Information


Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 1-5

>TRY IT!

Term Definition1. Certified management accountants

a. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

2. Accounting b. Licensed professional accountants who serve the general public.

3. Managerial accounting c. Any person or business to whom a business owes money.4. Certified public accountants

d. The field of accounting that focuses on providing information for internal decision makers.

5. Financial accounting e. Certified professionals who work for a single company.

6. Creditorf. The field of accounting that focuses on providing information for external decision makers.

Match the accounting terminology to the definition


>TerminologyTerm Definition

1. Certified management accountants

e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accountingd. The field of accounting that focuses on providing information for internal decision makers.

4. Certified public accountants

b. Licensed professional accountants who serve the general public.

5. Financial accountingf. The field of accounting that focuses on providing information for external decision makers.

6. Creditorc. Any person or business to whom a business owes money.

The Organizations That Govern Accounting

FASB• Financial Accounting

Standards Board• Privately funded• Creates the rules and

standards that govern financial accounting

SEC• Securities and

Exchange Commission

• Oversees the US financial markets


Generally Accepted Accounting Principles (GAAP)

• Issued by the FASB.• Establishes the rules for

recording transactions and preparing financial statements.

• Published online as part of the Accounting Standards Codification.

• Requires that information be useful.

1-8

Relevant = The info allows users to make

a decision.

Faithfully Representative =

The info is complete, neutral, and free

from material error.


Accounting Assumptions

1-9

Economic Entity

Assumption

Cost Principle

Going Concern

Assumption

Monetary Unit

Assumption


Types Of Entities



>TRY IT!Term Definition

1. Cost principlea. Oversees the creation and governance of accounting standards in the United States.

2. GAAP b. Requires an organization to be a separate economic unit.

3. Faithful representation c. Oversees US financial markets.

4. SECd. States that acquired assets and services should be recorded at their actual cost.

5. FASB e. Creates International Financial Reporting Standards.6. Monetary unit assumption f. The main US accounting rule book.7. Economic entity assumption g. Assumes that an entity will remain in operation for the foreseeable future.8. Going concern assumption h. Assumes that the financial statements are recorded in a monetary unit.9. IASB i. Requires information to be complete, neutral, and free from material error.



>TerminologyTerm Definition

1. Cost principled. States that acquired assets and services should be recorded at their actual cost.

2. GAAP f. The main US accounting rule book.

3. Faithful representation

i. Requires information to be complete, neutral, and free from material error.

4. SEC c. Oversees US financial markets.

5. FASBa. Oversees the creation and governance of accounting standards in the United States.

6. Monetary unit assumption

h. Assumes that the financial statements are recorded in a monetary unit.

7. Economic entity assumption

b. Requires an organization to be a separate economic unit.

8. Going concern assumption

g. Assumes that an entity will remain in operation for the foreseeable future.

9. IASB e. Creates International Financial Reporting Standards.


The Accounting Equation

1-13

LiabilitiesLiabilitiesAssetsAssets = +

Rule: The Balance Sheet Equation must ALWAYS be in

balance.

EquityEquity

Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall


1-14

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Assets are economic

resources that are expected to benefit the

business in the future.



1-15


Liabilities are debts that are owed to

creditors.

EquityEquity



1-16


Equity is the owner’s residual claim against the

assets of the company.

EquityEquity


1-17

LiabilitiesLiabilitiesAssetsAssets = + EquityEquity

Common Stock – Dividends + Revenues - Expenses


The owner’s claim on the resources

increase and decrease as the

company engages in earnings activities.


1-18



Revenues are economic

resources that have been earned by

delivering products or services to

customers.Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall


1-19



Expenses are the costs associated

with selling goods or services.




>TRY IT!

Assets 71,288$ Liabilities 2,260 Common Stock ?Dividends 14,420 Revenues 53,085 Expenses 28,675

Using the expanded accounting equation, solve for the missing amount.


>TRY IT!

How Do You Analyze A Transaction?

Think of a transaction as a very special kind

of historical event.1. It involves the

exchange of economic resources.

2. We must be able to measure the economic

impact in monetary units.

1-22

Is it a transaction?

Buying a copying machine for the office for $4,000

cash.

xMeeting with a potential customer.


Smart Touch Example(transactions)• Smart Touch Learning received $30,000 cash and issued

common stock to Sheena Bright, stockholder.• Paid $20,000 cash for land.• Bought $500 of office supplies on account.• Received $5,500 cash from clients for service revenue

earned.• Performed services for clients on account, $3,000.• Paid cash expenses: office rent, $2,000; employee salaries,

$1,200.• Paid $300 on the accounts payable created in transaction 3.• Collected $2,000 on the accounts receivable created in

transaction 5.• Paid cash dividends of $5,000 to stockholder, Sheena Bright.


How Do You Analyze A Transaction?Smart Touch Learning starts a new business.

The company sells $30,000 of Common Stock. How does this impact the Accounting Equation?

1-24

Note: You can make the analysis easier if the first question you ask is whether cash exchanged hands.


How Do You Analyze A Transaction?Next, Smart Touch purchases land for $20,000

cash.

1-25

In this transaction, all the change occurred on the left side of the equation. One asset was converted into a different asset.


How Do You Analyze A Transaction?In Transaction #3, Smart Touch buys $500 of

office supplies, offering to pay in 30 days.

1-26

Remember, in business it is quite common for a business to purchase something now, and pay for it later.



In Transaction #4, Smart Touch provides training services to customers for $5,500 cash.



In Transaction #5, Smart Touch performs $3,000 of services for a customer who will pay

in one month.



In Transaction #6, Smart Touch pays $3,200 in cash expenses; $2,000 for office rent and

$1,200 for employee salaries.



In Transaction #7, Smart Touch pays $300 to the store from which it purchased office

supplies in Transaction #3.



In Transaction #8, Smart Touch collects $2,000 from the client for which Smart Touch performed services in Transaction #5.


LO4: How Do You Analyze A Transaction?


Income Statement

Balance Sheet

These same four basic financial statements are

used by all companies as

the primary means of

communicating to stakeholders.

How Do You Prepare Financial Statements?

1-33

Statement of Retained Earnings

Statement of Cash Flows


Income Statement

Balance Sheet


1-34

Reports the success or failure of the company’s operations for a period of time.

RevenuesMinus

Expenses

Reports the success or failure of the company’s operations for a period of time.

RevenuesMinus

Expenses




Revenues Service Revenue 8,500$ Expenses Rent expense 2,000$ Salaries Expense 1,200 Total expenses 3,200 Net income 5,300$

SMART TOUCH LEARNINGIncome Statement

Month Ended November 30, 2014



Income Statement

Balance Sheet


1-37

Shows amounts and causes of

changes in Retained Earnings during the period.




The ending balance in Retained Earnings will also appear in the Stockholders’ Equity section of the Balance Sheet.


1-39

SMART TOUCH LEARNINGStatement of Retained EarningsMonth Ended November 30, 2014

Retained Earnings, Nov. 1, 2014 -$

Net income for the month 5,300 5,300

Dividends (5,000) Retained Earnings, Nov. 30, 2014 300$


From the Income

Statement

To be reported on Balance

Sheet

Income Statement

Balance Sheet


1-40

Reports assets and claims to

those assets at a specific point in

time.

Reports assets and claims to

those assets at a specific point in

time.




SMART TOUCH LEARNINGBalance Sheet

November 30, 2014

Cash 9,000$ Accounts Receivable 1,000 Office Supplies 500 Land 20,000 Total assets 30,500$

Accounts Payable 200$

Common Stock 30,000 Retained Earnings 300

Total Stockholders' Equity 30,300

Total Liabilities and Stockholders' Equity 30,500$

Assets

Liabilities

Stockholders' Equity

Note that the Balance Sheet follows the Accounting Equation.


Income Statement


Balance Sheet



1-43

Answers the question of whether the

business generates enough

cash to pay its bills.

Answers the question of whether the

business generates enough

cash to pay its bills.


SMART TOUCH LEARNINGStatement of Cash Flows

Month Ended November 30, 2014Cash Flows from Operating Activities: Receipts: Collections from customers 7,500$ Payments: For rent (2,000)$ For salaries (1,200) For office supplies (300) (3,500) Net cash provided by operating activities 4,000

Cash Flows from Investing Activities:Acquisition of land (20,000)

Net cash used by investing activities (20,000)

Cash Flows from Financing Activities: Sale of Common Stock 30,000 Dividends Paid (5,000)

Net cash provided by financing activities 25,000

Net increase in cash 9,000 Cash balance, November 1, 2014 - Cash balance, November 30, 2014 9,000$


Transactions 4 & 8

Transactions 6 & 7

Transaction 2

Transactions 1 & 9

How Do You Use Financial Statements to Evaluate Performance?


Accounting and the Business Environment Chapter 1 1-1Copyright ©2014 Pearson Education, Inc....

Documents

Transcript of Accounting and the Business Environment Chapter 1 1-1Copyright ©2014 Pearson Education, Inc....