ACCOUNTING 2-MANAGERIAL ACCOUNTING o Chapter 1: INTRODUCTION TO ACCOUNTING AND BUSINESS Teacher...

ACCOUNTING 2-MANAGERIAL ACCOUNTING 2-MANAGERIAL ACCOUNTINGACCOUNTING

o Chapter 1: INTRODUCTION TO Chapter 1: INTRODUCTION TO ACCOUNTING AND BUSINESSACCOUNTING AND BUSINESS

Teacher VersionTeacher Version

Learning ObjectivesLearning Objectives

1.1. Describe the nature of a business and the role of Describe the nature of a business and the role of accounting and ethics in business.accounting and ethics in business.

2.2. Summarize the development of accounting principles Summarize the development of accounting principles and relate them to practice.and relate them to practice.

3.3. State the accounting equation and define each State the accounting equation and define each element of the equation.element of the equation.

4.4. Describe and illustrate how business transactions Describe and illustrate how business transactions can be recorded in terms of the resulting change in can be recorded in terms of the resulting change in the elements of the accounting equation.the elements of the accounting equation.

5.5. Describe the financial statements of a corporation Describe the financial statements of a corporation and explain how they interrelate.and explain how they interrelate.

6.6. Describe and illustrate the use of the ratio of Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a liabilities to stockholders’ equity in evaluating a company’s financial condition.company’s financial condition.

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Learning Learning Objective

Objective Describe the nature of a

Describe the nature of a

business and the role of

business and the role of

accounting and ethics in

accounting and ethics in business.business.

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Nature of Business and AccountingNature of Business and Accounting

o A A BUSINESSBUSINESS is an is an ORGANIZATIONORGANIZATION in in which basic resources (which basic resources (INPUTSINPUTS) such as ) such as materials and labor, are materials and labor, are ASSEMBLEDASSEMBLED and and PROCESSEDPROCESSED to provide goods or services to provide goods or services ((OUTPUTSOUTPUTS) to customers.) to customers.

Nature of Business and AccountingNature of Business and Accounting

o The objective of most businesses is to The objective of most businesses is to EARNEARN a a PROFITPROFIT..

o Profit is the Profit is the DIFFERENCEDIFFERENCE between the between the amounts amounts RECEIVEDRECEIVED from customers for from customers for goods or services and the amounts goods or services and the amounts PAIDPAID for the for the INPUTSINPUTS used to provide the used to provide the goods or services.goods or services.

TYPES OF BUSINESSESTYPES OF BUSINESSES

SERVICE BUSINESSES SERVICE PROVIDED

DELTA AIR LINES TRANSPORTATION SERVICES

WALT DISNEY COMPANY ENTERTAINMENT SERVICES

MERCHANDISING BUSINESSES PRODUCT PROVIDED

WALMART GENERAL MERCHANDISE

AMAZON.COM INTERNET BOOKS, MUSIC, VIDEOS

MANUFACTURING BUSINESSES PRODUCT PROVIDED

FORD MOTOR COMPANY CARS, TRUCKS, VANS

DELL PERSONAL COMPUTERS

The Role of Accounting in BusinessThe Role of Accounting in Business

o ACCOUNTINGACCOUNTING can be defined as an can be defined as an information system that provides information system that provides REPORTSREPORTS to users about the to users about the ECONOMICECONOMIC ACTIVITIESACTIVITIES and and CONDITIONCONDITION of a of a BUSINESSBUSINESS..


The Role of Accounting in BusinessThe Role of Accounting in Business

o The process by which accounting provides The process by which accounting provides information to users is as follows:information to users is as follows: IDENTIFY USERSIDENTIFY USERS

ASSESS USERS’ INFORMATION NEEDSASSESS USERS’ INFORMATION NEEDS

DESIGN THE ACCOUNTING INFORMATION DESIGN THE ACCOUNTING INFORMATION SYSTEM TO MEET USERS’ NEEDSSYSTEM TO MEET USERS’ NEEDS

RECORD ECONOMIC DATA ABOUT RECORD ECONOMIC DATA ABOUT BUSINESS ACTIVITIES AND EVENTSBUSINESS ACTIVITIES AND EVENTS

PREPARE ACCOUNTING REPORTS FOR PREPARE ACCOUNTING REPORTS FOR USERSUSERS


MANAGERIAL AccountingMANAGERIAL Accounting

o The area of accounting that provides The area of accounting that provides internal users with information is called internal users with information is called MANAGERIALMANAGERIAL ACCOUNTINGACCOUNTING or or MANAGEMENT MANAGEMENT ACCOUNTINGACCOUNTING . .

o MANAGERIALMANAGERIAL accountants employed by accountants employed by a business are employed in a business are employed in PRIVATEPRIVATE accounting.accounting.


FINANCIALFINANCIAL Accounting Accounting

o The area of accounting that provides The area of accounting that provides external users with information is called external users with information is called FINANCIALFINANCIAL ACCOUNTINGACCOUNTING..

o The objective of financial accounting is to The objective of financial accounting is to provide RELEVANT and provide RELEVANT and TIMELYTIMELY information for the information for the DECISION-MAKINGDECISION-MAKING needs of users needs of users OUTSIDEOUTSIDE of the business. of the business.

o General-purposeGeneral-purpose FINANCIALFINANCIAL STATEMENTSSTATEMENTS are one type of financial are one type of financial accounting report that is distributed to accounting report that is distributed to EXTERNALEXTERNAL users. users.

Role of Ethics in Accounting and Role of Ethics in Accounting and BusinessBusinesso The objective of accounting is to provide The objective of accounting is to provide

relevant, timely information for user relevant, timely information for user DECISIONDECISION MAKINGMAKING..

o Accountants must behave in an Accountants must behave in an ETHICALETHICAL manner so that the information they manner so that the information they provide users will be provide users will be TRUSTWORTHYTRUSTWORTHY and, thus, and, thus, USEFULUSEFUL for decision making. for decision making.

o ETHICSETHICS are are MORALMORAL principles that guide principles that guide the the CONDUCTCONDUCT of individuals. of individuals.


Opportunities for AccountantsOpportunities for Accountants

o Accountants and their staffs who provide Accountants and their staffs who provide services on a services on a FEEFEE BASISBASIS are said to be are said to be employed in employed in PUBLICPUBLIC accounting. accounting.

o Accountants employed by a Accountants employed by a BUSINESSBUSINESS FIRMFIRM, or a , or a NOT-FOR-PROFITNOT-FOR-PROFIT ORGANIZATIONORGANIZATION are said to be employed in are said to be employed in PRIVATEPRIVATE accounting. accounting.

o Public accountants who have met a Public accountants who have met a STATES’S STATES’S EDUCATIONEDUCATION, , EXPERIENCEEXPERIENCE and and EXAMINATIONEXAMINATION requirements may become requirements may become CERTIFIEDCERTIFIED PUBLICPUBLIC ACCOUNTANTSACCOUNTANTS (CPA’S)(CPA’S)



ObjectiveSummarize the development of

Summarize the development of

accounting principles and relate

accounting principles and relate them to practice.

them to practice.

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Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

o Financial accountants follow Financial accountants follow GENERALLY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ACCEPTED ACCOUNTING PRINCIPLES ((GAAPGAAP)) in preparing reports. in preparing reports.

o Within the U.S., the Within the U.S., the FINANCIAL FINANCIAL ACCOUNTING STANDARDS BOARD ACCOUNTING STANDARDS BOARD (FASB) (FASB) has the has the PRIMARYPRIMARY responsibility responsibility for for DEVELOPINGDEVELOPING accounting principles. accounting principles.


Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrincipleso The The SECURITY AND EXCHANGE SECURITY AND EXCHANGE

COMMISSIONCOMMISSION((SECSEC)), an , an AGENCYAGENCY of the U.S. of the U.S. government, has authority over the government, has authority over the accounting and financial accounting and financial DISCLOSURESDISCLOSURES for for companies whose companies whose SHARESSHARES of of OWNERSHIPOWNERSHIP ((STOCKSTOCK) are ) are TRADEDTRADED and sold to the and sold to the PUBLICPUBLIC..

o Many countries Many countries OUTSIDEOUTSIDE the United States the United States use generally accepted accounting principles use generally accepted accounting principles adopted by the adopted by the INTERNATIONAL INTERNATIONAL ACCOUNTING STANDARDS BOARD ACCOUNTING STANDARDS BOARD ((IASBIASB))..


Business Business ENTITYENTITY Concept Concept

o Under the Under the BUSINESS ENTITY BUSINESS ENTITY conceptconcept, , the the ACTIVITIESACTIVITIES of a business are of a business are recorded recorded SEPARATELYSEPARATELY from the activities from the activities of its of its OWNERS, CREDITORSOWNERS, CREDITORS, or , or OTHEROTHER BUSINESSESBUSINESSES..

A A PROPRIETORSHIPPROPRIETORSHIP is owned by is owned by ONEONE individual.individual.

70% of business 70% of business entities in the U.S. entities in the U.S. are proprietorships.are proprietorships.

They are easy and They are easy and cheap to organize.cheap to organize.

Resources are Resources are limited to those of limited to those of the owner.the owner.

Used by small Used by small businesses.businesses.

A A PARTNERSHIPPARTNERSHIP is similar to a is similar to a PROPRIETORSHIPROPRIETORSHIPP except that it is except that it is owned by owned by TWOTWO or or MOREMORE individuals. individuals.

10% of business 10% of business organizations in organizations in the U.S. the U.S. (combined with (combined with limited liability limited liability companies) are companies) are partnerships.partnerships.

Combines the Combines the skills and skills and resources of more resources of more than one person.than one person.

A A CORPORATIONCORPORATION is organized under is organized under STATESTATE or or FEDERALFEDERAL statutes statutes as a separate as a separate LEGALLEGAL TAXABLETAXABLE entity.entity.

Generates 90% of Generates 90% of business revenues.business revenues.

20% of the business 20% of the business organizations in the organizations in the U.S.U.S.

Ownership is divided Ownership is divided into shares, called into shares, called stock.stock.

Can obtain large Can obtain large amounts of resources amounts of resources by issuing stock.by issuing stock.

Used by large Used by large businesses.businesses.

A A LIMITED LIMITED LIABILITY LIABILITY COMPANY COMPANY ((LLCLLC)) combines the combines the attributes of a attributes of a PARTNERSHIPPARTNERSHIP and a and a CORPORATIONCORPORATION..

10% of business 10% of business organizations in the organizations in the U.S. (combined U.S. (combined with partnerships).with partnerships).

Often used as an Often used as an alternative to a alternative to a partnership.partnership.

Has tax and legal Has tax and legal liability advantages liability advantages for owners.for owners.


COST ConceptCOST Concept

o Under the Under the COSTCOST conceptconcept, amounts are , amounts are INITIALLYINITIALLY recorded in the accounting recorded in the accounting records at their records at their COSTCOST or or PURCHASEPURCHASE PRICEPRICE..


o Aaron Publishers purchased a building on February 20, Aaron Publishers purchased a building on February 20, 2012, for $150,000. Other amounts related to this 2012, for $150,000. Other amounts related to this purchased are shown.purchased are shown.

• Price listed by seller on Jan. 1, 2012Price listed by seller on Jan. 1, 2012 $160,000$160,000

• Aaron Publishers’ initial offer to buy on Aaron Publishers’ initial offer to buy on Jan. 31, 2012Jan. 31, 2012 140,000 140,000

• Purchase price on Feb. 20, 2012Purchase price on Feb. 20, 2012 150,000 150,000

• Estimated selling price on Dec. 31, 2014Estimated selling price on Dec. 31, 2014 220,000 220,000

• Assessed value for property taxes, Assessed value for property taxes, Dec. 31, 2014Dec. 31, 2014 190,000 190,000

• At what price will this be recorded on the books of Aaron At what price will this be recorded on the books of Aaron Publishers using the Cost Concept? Publishers using the Cost Concept?

• $150,000$150,000


o The The OBJECTIVITYOBJECTIVITY conceptconcept requires that requires that the amounts recorded in the accounting the amounts recorded in the accounting records be based on records be based on OBJECTIVEOBJECTIVE evidence. evidence.

o Only the Only the FINALFINAL AGREED-UPONAGREED-UPON amount is amount is OBJECTIVEOBJECTIVE enough to be recorded in the enough to be recorded in the accounting records.accounting records.

The The UNIT OF MEASURE UNIT OF MEASURE conceptconcept requires requires that that ECONOMIC DATA ECONOMIC DATA be recorded in be recorded in DOLLARSDOLLARS..



ObjectiveState the accounting equation

State the accounting equation

and define each element of the

and define each element of the equation.equation.

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The ACCOUNTING EQUATIONThe ACCOUNTING EQUATION

o The resources owned by a business are its The resources owned by a business are its ASSETSASSETS..

o The rights of The rights of CREDITORSCREDITORS are the are the DEBTSDEBTS of of the business and are called the business and are called LIABILITIESLIABILITIES..

o The rights of the The rights of the OWNERSOWNERS are called are called STOCKHOLDER’S equity for a corporation and STOCKHOLDER’S equity for a corporation and OWNER’SOWNER’S equity for a proprietorship, equity for a proprietorship, partnership, or limited liability company.partnership, or limited liability company.

o The equation The equation ASSETS = LIABILITIES + ASSETS = LIABILITIES + OWNER’S EQUITYOWNER’S EQUITY is called the is called the ACCOUNTING EQUATIONACCOUNTING EQUATION..



ObjectiveDescribe and illustrate how business

Describe and illustrate how business

transactions can be recorded in

transactions can be recorded in

terms of the resulting change in the

terms of the resulting change in the

elements of the accounting

elements of the accounting equation.equation.

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o A A BUSINESSBUSINESS transactiontransaction is an is an ECONOMICECONOMIC event or event or CONDITIONCONDITION that that DIRECTLY changes an entity’s DIRECTLY changes an entity’s FINANCIALFINANCIAL condition or its results of condition or its results of OPERATIONSOPERATIONS..

o The liability created by a purchase on The liability created by a purchase on ACCOUNTACCOUNT is called an is called an ACCOUNTS ACCOUNTS PAYABLEPAYABLE..

o Items such as supplies that will be used in Items such as supplies that will be used in the business in the the business in the FUTUREFUTURE are called are called PREPAIDPREPAID EXPENSESEXPENSES, which are assets., which are assets.


o REVENUEREVENUE from providing services is from providing services is recorded as recorded as FEES EARNEDFEES EARNED..

o Revenue from the Revenue from the SALESALE of merchandise is of merchandise is recorded as recorded as SALESSALES..

o Other examples of revenue include rent, Other examples of revenue include rent, which is recorded as which is recorded as RENTRENT revenue, and revenue, and INTERESTINTEREST, which is recorded as interest , which is recorded as interest revenue.revenue.

o An account An account RECEIVABLERECEIVABLE is a claim against is a claim against a a CUSTOMERCUSTOMER, which is an , which is an ASSETASSET..


You Should Note the Following:You Should Note the Following:

o The effect of every transactions is an The effect of every transactions is an INCREASE OR A DECREASE IN ONE OR INCREASE OR A DECREASE IN ONE OR MOR OF THE ACCOUNTING EQUATION MOR OF THE ACCOUNTING EQUATION ELEMENTS.ELEMENTS.

o The two sides of the accounting equations The two sides of the accounting equations are are ALWAYS EQUALALWAYS EQUAL..

o The stockholders’ equity (owner’s equity) The stockholders’ equity (owner’s equity) is is INCREASED BY AMOUNTS INVESTED INCREASED BY AMOUNTS INVESTED by STOCKHOLDERS (CAPITAL STOCK).by STOCKHOLDERS (CAPITAL STOCK).


You Should Note the Following:You Should Note the Following:

o The stockholders’ equity (owner’s equity) The stockholders’ equity (owner’s equity) isisINCREASED BY REVENUE AND INCREASED BY REVENUE AND DECREASED BY EXPENSESDECREASED BY EXPENSES..

o The stockholders’ equity (The stockholders’ equity (OWNER’S OWNER’S EQUITYEQUITY) is decreased ) is decreased BY DIVIDENDS BY DIVIDENDS PPAID to stockholders.AID to stockholders.

o RETAINED EARNINGS RETAINED EARNINGS is the is the STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY created from created from business operations through revenue and business operations through revenue and EXPENSEEXPENSE transactions. transactions.



ObjectiveDescribe the financial

Describe the financial

statements of a corporation and

statements of a corporation and

explain how they interrelate.

explain how they interrelate.

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FINANCIAL Statements FINANCIAL Statements

o After transactions have been After transactions have been RECORDEDRECORDED and and SUMMARIZEDSUMMARIZED, reports are prepared , reports are prepared for users. The accounting REPORTS for users. The accounting REPORTS providing this information are called providing this information are called FINANCIAL FINANCIAL STATEMENTSSTATEMENTS..


Income Statement Income Statement

o The The INCOME STATEMENT INCOME STATEMENT reports the reports the revenues and revenues and EXPENSESEXPENSES for a for a PERIODPERIOD of of time, based on the time, based on the MATCHINGMATCHING concept. concept.

o The The MATCHINGMATCHING concept is applied by concept is applied by ““MATCHINGMATCHING” the ” the EXPENSESEXPENSES incurred incurred during a period with the during a period with the REVENUEREVENUE that that those those EXPENSESEXPENSES generated. generated.

o The excess of the The excess of the REVENUEREVENUE over the over the EXPENSESEXPENSES is called is called NETNET income, income, NETNET PROFITPROFIT, or , or EARNINGSEARNINGS. If . If EXPENSESEXPENSES exceed exceed REVENUEREVENUE, the , the EXCESSEXCESS is a is a NETNET loss. loss.


Retained Earnings StatementRetained Earnings Statement

o The The RETAINED EARNINGS STATEMENT RETAINED EARNINGS STATEMENT reports the changes in the reports the changes in the RETAINEDRETAINED EARNINGSEARNINGS for a period of time. for a period of time.

o It is prepared It is prepared AFTERAFTER the income the income statement because the statement because the NETNET INCOMEINCOME or or NETNET LOSS for the LOSS for the PERIODPERIOD must be must be reported in this statement.reported in this statement.


BALANCE SHEETBALANCE SHEET

o A balance sheet is a list of the A balance sheet is a list of the ASSETSASSETS, , LIABILITIESLIABILITIES, and , and STOCKHOLDERS’ STOCKHOLDERS’ EQUITY EQUITY as of a as of a SPECIFIC DATESPECIFIC DATE..

o The The ACCOUNTACCOUNT form of a form of a BALANCE BALANCE SHEET SHEET lists the assets on the lists the assets on the LEFTLEFT and and the the LIABILITIESLIABILITIES and and STOCKHOLDERS’ STOCKHOLDERS’ EQUITY EQUITY on the right. It resembles the on the right. It resembles the basic format of the basic format of the ACCOUNTING ACCOUNTING EQUATIONEQUATION..


STATGEMENT of Cash FLOWSSTATGEMENT of Cash FLOWS

o A A STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS is a is a summary of the cash summary of the cash RECEIPTSRECEIPTS and cash and cash PAYMENTSPAYMENTS for a for a SPECIFIC PERIOD SPECIFIC PERIOD of of time.time. It consists of three sections: It consists of three sections:

(1)(1) OPERATING ACTIVITIESOPERATING ACTIVITIES

(2) INVESTING ACTIVITIES(2) INVESTING ACTIVITIES

(3) FINANCING ACTIVITIES(3) FINANCING ACTIVITIES


o The The cash flows cash flows from from OPERATING OPERATING ACTIVITIES ACTIVITIES section reports a summary of section reports a summary of cash cash RECEIPTSRECEIPTS and cash and cash PAYMENTSPAYMENTS from from operations.operations.o The The cash flows from cash flows from INVESTING INVESTING ACTIVITIES ACTIVITIES section reports the cash section reports the cash transactions for the transactions for the ACQUISITIONACQUISITION and and SALESALE of relatively permanent assets. of relatively permanent assets.

o The The cash flows from cash flows from FINANCING FINANCING ACTIVITIES ACTIVITIES section reports the cash section reports the cash TRANSACTIONSTRANSACTIONS related to cash related to cash INVESTMENTSINVESTMENTS by the by the OWNEROWNER, , BORROWINGSBORROWINGS, and cash dividends, and cash dividends

This amount should match CASH on the BALANCE SHEET.



ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

the ratio of liabilities to

the ratio of liabilities to

stockholders’ equity in evaluating a

stockholders’ equity in evaluating a

company’s financial condition.

company’s financial condition.

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RATIO OF RATIO OF LIABILITIES TO LIABILITIES TO

STOCKHOLDERS’ STOCKHOLDERS’ EQUITYEQUITY

=TOTAL LIABILITIES

Total STOCKHOLDERS’ Equity

Ratio of _________ to _________ Equity

= $

$ = _______

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