introduction to accounting

5/27/2018 Introduction to Accounting

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Chapter 1I ntroduction to Accounting

and BusinessFinancial and Managerial Accounting

8th Edition

Warren Reeve Fess

REVISED BY JESUS ALARCON AUG 2011


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Manufacturing Business

Product

General Motors Cars, trucks, vans

Intel Computer chips

Boeing Jet aircraft

Nike Athletic shoes and apparelCoca-Cola Beverages

Sony Stereos and television

Types of Businesses


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Merchandising Business

Product

Wal-Mart General merchandise

Toys R Us Toys

Circuit City Consumer electronics

Lands End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses


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Service Business

Product

Disney Entertainment

Delta Air Lines Transportation

Marriott Hotels Hospitality and lodging

Merrill Lynch Financial adviceSprint Telecommunication

Types of Businesses


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There are three types ofbusiness organizations

Proprietorship

Partnership

Corporation


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A proprietorship

is owned by one

individual.

Advantages Ease in organizing

Low cost of

organizing

Disadvantage

Limited source of

financial resources Unlimited liability

Joes


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A partnershipis

owned by two or

more individuals.

Advantages

More financialresources than a

proprietorship.

Additionalmanagement skills.

Disadvantage

Unlimited liability.

Joe and Martys


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A corporationis

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.


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Business Strategies

Abusiness strategy is an integrated

set of plans and actions designed to

enable the business to gain anadvantage over its competitors, and

in doing so, to maximize its profits.


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Business Strategies

Under alow-cost strategy, a businessdesigns and produces products or

services of acceptable quality at a cost

lower than that of its competitors.Under adifferential strategy, a business

designs and produces products or services

that possess unique attributes orcharacteristics which customers are willing

to pay a premium price.


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A business stakeholderis a person or

entity having an interest in theeconomic performance of the business.

Business Stakeholders


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2Assessstakeholders

informational

needs.

THE PROCESS OF PROVIDING

INFORMATION

STAKEHOLDERSInternal:

Owners,

managers,employees

External:

Customers,

creditors,government1

Identify

stake-

holders.


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AccountingInformation

System

Design the

accounting

information

system to meet

stakeholders

needs.

34

Record

economicdata about

business

activities

and events.

THE PROCESS OF PROVIDING

INFORMATION


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5

Prepare

accounting

reports forstakeholders.

STAKEHOLDERSInternal:

Owners,

managers,

employees

External:

Customers,

creditors,

government

Accounting

Information

System

The Process of Providing

Information


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Profession 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 beemployed in public accounting.


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Generally Accepted

Accounting

Principles (GAAP)


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The business entity concept

limits the economic data inthe accounting system to

data related directly to the

activities of the business.The cost conceptis the

basis for entering the

exchange price, or costof an acquisition in the

accounting records.


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The objectivity concept

requires that the accounting

records and reports be based

upon objective evidence.The unit-of-measure

conceptrequires that

economic data berecorded in dollars.


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The Accounting Equation

Assets = Liabilities + Owners Equity

The resources

owned by a

business


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The rights of the

creditors, which

represent debtsof the business


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The rights of the

owners


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What is a business

transaction?

Abusiness transaction is an economic event orcondition that directly changes an entitys financial

condition or directly affects its results of operations.


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On JULY 1st,

2011, Chris

Clark organized

a corporation

that will be

known as

NetSolutions.


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a. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions in

return for shares of stock in thecorporation.

Capital Stock

25,000 Investment by

stockholder

Cash

25,000a.

Assets Owners Equity=

=


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b. NetSolutions exchanged $20,000 for land.

Capital Stock

25,000Cash + Land

25,000Bal.

Assets Owners Equity=

=b. 20,000 +20,000

Bal. 5,000 20,000 25,000


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Accounts CapitalCash + Supplies + Land Payable Stock

Assets

c. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay the

supplier in the near future (on account).

Owners

Liabilities + Equity=

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

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

=


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d. + 7,500 + 7,500

Assets

d. NetSolutions provided services to

customers, earning fees of $7,500 and

received the amount in cash.

Owners

Liab . + Equity=

Bal. 5,000 1,350 20,000 1,350 25,000=

Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings

Bal.12,500 1,350 20,000 1,350 25,000 7,500

Fees

earned


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e. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.

Bal.12,500 1,350 20,000 1,350 25,000 7,500

AssetsOwners

Liab . + Equity


e. 3,650 2,125

800

450

275

=

Bal. 8,850 1,350 20,000 1,350 25,000 3,850

=

Expenses


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f. NetSolutions paid $950 to

creditors during the month.

AssetsOwners

Liab . + Equity


Bal. 8,850 1,350 20,000 1,350 25,000 3,850

=

=

f. 950 950

Bal. 7,900 1,350 20,000 400 25,000 3,850


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g. At the end of the month, the cost

of supplies on hand is $550, so

$800 of supplies were used.

AssetsOwners

Liab . + Equity


=

=Bal. 7,900 1,350 20,000 400 25,000 3,850

g. 800 800

Bal. 7,900 550 20,000 400 25,000 3,050

Supplies

Expense


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h. At the end of the month, NetSolutions

pays $2,000 to stockholders.

AssetsOwners

Liab . + Equity


=Bal. 7,900 550 20,000 400 25,000 3,050

h. 2,000 2,000

Bal. 5,900 550 20,000 400 25,000 1,050

=

=

Dividends


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Increased by

Capital Stock

Effects of Transactions on Owners Equity

Stockholders

investments

+


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Decreased byIncreased by

Retained Earnings

Effects of Transactions on Owners Equity

Revenues

+

Expenses

Decreased by

Dividends


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Accounting reports, called

f inancial statements,

provide summarizedinformation to the users.


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FINANCIAL STATEMENTS

Income statementA summary of the revenueand expenses for specific period of time.

Retained earnings statementA summary of theearnings retained in the corporation for

specific period of time.

alance sheetA list of the assets, liabilities,and stockholders equity s of specific d te.

Statement of cash flowsA summary of thecash receipts and disbursements for specific

period of time.

NetSolutions


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Fees earned $7 500 00Operating expenses:

Rent expense

$2 125 00Wages expense

800 00

Supplies expense

450 00Utilities expense

275 00Miscellaneous expense

Total operating expenses 4 450 00

NetSolutions

Income Statement

For the Month from JULY 1stto JULY 30th, 2011

800 00

Net income $3 050 00


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NetSolutions

Retained Earnings Statement

For the Month Ended JULY 30th, 2011Less dividends 2 000 00

Retained earnings, JULY 30, 2011 $1 050 00

Net income for JULY $3 050 00


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Assets Liabilities

NetSolutions

Balance Sheet

JULY 30th, 2011Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Stockholders Equity

Land 20 000 00 Capital Stock $25,000

Ret. Earnings l,050 26 050 00

Total liabilities and

Total assets $26 450 00 stockholders equity $26 450 00

From the

retained earnings

statement

This balance sheet presentedusing the accountform


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Cash flows from operating activities:Cash received from customers $ 7 500 00

Deduct cash payments for expenses

and payments to creditors 4 600 00

Net cash flow from operating activities 2 900 00Cash flows from investing activities:

Cash payment for acquisition of land (20 000 00

Cash flows from financing activities:

Cash received as owners investment $25 000 00Deduct cash withdrawal by owner 2 000 00

Net cash flow from financing activities 23 000 00

Net cash flow and JUL 30, 2011 cash bal. $ 5 900 00

NetSolutions

Statement of Cash Flows

For the Month Ended JULY 30th, 2011

Should match Cashon the balance sheet

)


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Statement of Cash Flows

Cash F lows from Operating Activities

Thissection reports a summary of cash receipts and

cash payments from operations.

Cash F lows from Investing Activi ties

This sectionreports the cash transactions for the acquisition and

sale of relatively permanent assets.

Cash F lows from F inancing Activi ties

Thissection reports the cash transactions related to cash

investments by the owner, borrowings, and cash

withdrawals by the owner.

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