ch01 - introduction to accounting and business

Chapter Chapter 11Introduction to Accounting Introduction to Accounting

and Businessand BusinessAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Like right now.

Some of the action has been automated, so click the mouse when you see this lighting bolt in the lower right-hand

corner of the screen. You can point and click anywhere on the screen.

1. Describe the nature of a business.2. Describe the role of accounting in business.3. Describe the importance of business ethics and the

basic principles of proper ethical conduct.4. Describe the profession of accounting.5. Summarize the development of accounting

principles and relate them to practice.6. State the accounting equation and define each

element of the equation.

ObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.

ObjectivesObjectives

8. Describe the financial statements of a proprietorship and explain how they interrelate.

9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.

Manufacturing BusinessManufacturing Business

ProductProduct

General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television

Types of Businesses

Merchandising BusinessMerchandising Business

ProductProduct

Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses

Service BusinessService Business

ProductProduct

Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Types of Businesses

There are three types of business organizations

Proprietorship Partnership Corporation

A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of

organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

Joe’s

A partnership is owned by two or more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage• Unlimited liability.

Joe and Marty’s

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain

large amounts of resources by issuing stocks.

Disadvantage• Double taxation.

J & M, Inc.

Business StrategiesBusiness Strategies

A business strategy is an integrated set of plans and actions designed to

enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.


Under a low-cost strategy, a business designs and produces products or

services of acceptable quality at a cost lower than that of its competitors.

Wal-MartSouthwest Airlines


Under a differential strategy, a business designs and produces products or services

that possess unique attributes or characteristics which customers are willing

to pay a premium price.Maytag

Tommy Hilfiger

Value Chain of a BusinessValue Chain of a Business

A value chain is the way a business adds value for its

customers by processing inputs into product or service.

InputsInputs Business Business ProcessesProcesses

Products or Products or ServicesServices

Customer Customer ValueValue

A business stakeholder is a person or entity having an interest in the

economic performance of the business.

Business StakeholdersBusiness Stakeholders

2Assess stakeholders’ informational needs.

The Process of The Process of Providing InformationProviding Information

STAKEHOLDERSInternal: Owners, managers, employees

External: Customers, creditors, government

1Identify stake-holders.

Accounting Information

System

Design the accounting information system to meet stakeholders’ needs.

34Record economic data about business activities and events.


5Prepare accounting reports for stakeholders.

STAKEHOLDERSInternal: Owners, managers, employees

External: Customers, creditors, government

Accounting Information

System


Business EthicsBusiness Ethics

1. Avoid small ethical lapses.2. Focus on your long-term

reputation.3. You may expect to suffer

adverse personal consequences for holding to an ethical position.

Sound Principles that

form the foundation for

ethical behavior

Profession of AccountingProfession of Accounting

Accountants employed by a business firm or a not-for-profit organization are said to be

engaged in private accounting.

Accountants and their staff who provide services on a fee basis are said to be

employed in public accounting.

Generally Accepted Generally Accepted Accounting Accounting

Principles (GAAP)Principles (GAAP)

The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.

The cost concept is the basis for entering the

exchange price, or cost of an acquisition in the

accounting records.

The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based

upon objective evidence.upon objective evidence.The unit-of-measure concept requires that

economic data be recorded in dollars.

The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The resources owned by a owned by a

businessbusiness



The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business



The rights of the The rights of the ownersowners

What is a business transaction?

A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2005, Chris

Clark begins a business that will

be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.

Chris Clark, Capital25,000 Investment

by Chris Clark

Cash25,000 a.

Assets Owner’s Equity=

=

b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350Bal. 5,000 1,350 20,000 1,350 25,000

=

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500


Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=

e. – 3,650 –2,125– 800– 450– 275

WagesRentUtil.Misc.


Assets

e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850


Assets

f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.


Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850


Assets

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.


Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies expense


Assets

h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050

With-drawal

=

=

Owner’s withdrawals

Expenses

Decreased byDecreased by

Owner’s Equity

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Increased byIncreased by

Owner’s investments

Revenues

Net income

Accounting reports, called financial statements, provide summarized

information to the owner.

Financial StatementsFinancial Statements• Income statement—A summary of the revenue and

expenses for a specific period of time.• Statement of owner’s equity—A summary of the

changes in the owner’s equity that have occurred during a specific period of time.

• Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.

• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

Fees earned $7 500 00Operating expenses:

Rent expense $2 125 00Wages expense

800 00Supplies expense

450 00Utilities expense 275 00Miscellaneous expense

Total operating expenses 1 135 00

NetSolutionsIncome Statement

For the Month Ended November 30, 2005

800 00

Net income $3 050 00To the statement To the statement of owner’s equityof owner’s equity

Chris Clark, capital, November 1, 2005 $ 0

NetSolutionsStatement of Owner’s Equity


Investment on November 1 $25 000 00Net income for November 3 050 00

$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Chris Clark, capital, November 30, 2005 $26 050 00

From the income From the income statementstatement

To the To the balance sheetbalance sheet

Assets Liabilities

NetSolutionsBalance Sheet

November 30, 2005

Cash $ 5 900 00 Accounts Payable $ 400 00Supplies 550 00 Owner’s EquityLand 20 000 00 Chris Clark, cap. 26 050 00

Total liabilities andTotal assets $26 450 00 owner’s equity $26 450 00

From the From the statement of statement of

owner’s equityowner’s equity

This balance sheet presented using the account form

When the balance sheet displays the liabilities and owner’s equity below the assets, the report form

is being used.

Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 00

Cash flows from investing activities:Cash payment for acquisition of land (20 000 00

Cash flows from financing activities:Cash received as owner’s investment $25 000 00Deduct cash withdrawal by owner 2 000 00Net cash flow from financing activities 23 000 00

Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00

NetSolutionsStatement of Cash Flows


Should match Should match CashCash on the balance sheet on the balance sheet

)

Statement of Cash FlowsStatement of Cash FlowsCash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations.

Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets.

Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

Ratio of liabilities to owner’s equity =

Total Liabilities Total owner’s equity (or total

stockholders’ equity)

The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze

the firm’s ability to withstand poor business conditions.

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

Ratio of liabilities to

owner’s equity=

$400 $26,050

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

= 0.015Ratio of

liabilities to owner’s equity

The End

Chapter 1Chapter 1

ch01 - introduction to accounting and business

Education