Chapter 2-1. Chapter 2-2 Accounting for Business Combinations Advanced Accounting, Third Edition 22.
Chapter _ 1 Accounting in Business
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Transcript of Chapter _ 1 Accounting in Business
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Accounting inBusinessChapter
1
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Identifies
Records
CommunicatesRelevant
Reliable
Comparable
Importance of Accounting
Accountingis a
system that
information
that is
to help users makebetter decisions.
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IdentifyingBusinessActivities
RecordingBusinessActivities
CommunicatingBusinessActivities
Accounting Activities
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Users of Accounting Information
External Users
Financial accountingprovidesexternal users with financial
statements.
Internal Users
Managerial accountingprovidesinformation needs for internal
decision makers.
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Opportunities in Accounting
Financial
PreparationAnalysisAuditingRegulatory
ConsultingPlanningCriminalinvestigation
Managerial
General accountingCost accountingBudgetingInternal auditing
ConsultingControllerTreasurerStrategy
Taxation
PreparationPlanningRegulatoryInvestigations
ConsultingEnforcementLegal servicesEstate planning
Accounting-related
Lenders
ConsultantsAnalystsTradersDirectorsUnderwritersPlannersAppraisers
FBI investigators
Market researchersSystems designersMerger servicesBusiness valuationHuman servicesLitigation supportEntrepreneurs
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Beliefs thatdistinguish
right fromwrong
Acceptedstandards of
good and badbehavior
Ethics
EthicsA Key Concept
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Identifyethical concerns
Analyzeoptions
Make ethicaldecision
Use personalethics to
recognize ethicalconcern.
Consider all goodand bad
consequences.
Choose bestoption afterweighing all
consequences.
Guidelines for Ethical Decision Making
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Financial accounting practice is governed byconcepts and rules known as generally accepted
accounting principles (GAAP).
Generally Accepted AccountingPrinciples
RelevantInformation
Affects the decision ofits users.
Reliable Information Is trusted byusers.
ComparableInformation
Is helpful in contrastingorganizations.
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The Securities and Exchange Commissionisthe government group that establishes
reporting requirements for companies thatissue stock to the public.
Setting Accounting Principles
Financial AccountingStandards Boardis the privategroup that sets both broad and
specific principles.
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Principles of Accounting
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating
instead of being closed or sold.
Cost Principle
Accounting information isbased on actual cost.
Objectivity Principle
Accounting information issupported by independent,
unbiased evidence.
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Principles of Accounting
Revenue Recognition Principle
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.
Monetary Unit Principle
Express transactions and events inmonetary, or money, units.
Business Entity Principle
A business is accounted for
separately from other business
entities, including its owner.
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Business Entity Forms
Proprietorship Partnership Corporation
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Characteristics Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yesLimited liability no no yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
*
* Proprietorships and partnerships that are set up as LLCs
provide limited liability.
Characteristics of Businesses
Exh.
1.8
*
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Owners of a corporation are called
shareholders(or stockholders).
When a corporation issues onlyone class of stock, we call it
common stock (or capital stock).
Corporation
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AssetsLiabilities& Equity
Accounting Equation
Liabilities EquityAssets = +
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Land
Equipment
Buildings
Cash
Vehicles
StoreSupplies
NotesReceivable
AccountsReceivable
Resourcesowned orcontrolled
by a
company
Assets
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Ownersclaims
on
assets
Revenues
OwnerInvestments
OwnerWithdrawals
Expenses
Equity
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Liabilities EquityAssets = +
Expanded Accounting Equation
Revenues ExpensesOwner
Capital
Owner
Withdrawals_
+_
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The accounts involved are:(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Purchased supplies paying $1,000cash.
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The accounts involved are:(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Purchased equipment for $15,000cash.
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Transaction Analysis
Purchased equipment for $15,000cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
(1) 20,000$ 20,000$
(2) (1,000) 1,000$
(3) (15,000) 15,000$
4,000$ 1,000$ 15,000$ -$ -$ 20,000$
20,000$ = 20,000$
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis
Purchased Supplies of $200 andEquipment of $1,000 on account.
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Transaction Analysis
Purchased Supplies of $200 andEquipment of $1,000 on account.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
(1) 20,000$ 20,000$
(2) (1,000) 1,000$
(3) (15,000) 15,000$
(4) 200 1,000 1,200$
4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$
21,200$ = 21,200$
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis
Borrowed $4,000 from 1st AmericanBank.
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Transaction Analysis
Borrowed $4,000 from 1st AmericanBank.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
(1) 20,000$ 20,000$
(2) (1,000) 1,000$
(3) (15,000) 15,000$
(4) 200 1,000 1,200$
(5) 4,000 4,000$
8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
25,200$ = 25,200$
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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
CapitalBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
25,200$ = 25,200$
Transaction Analysis
The balances so far appear below. Note that theBalance Sheet Equation is still in balance.
Now lets look at transactions involving
revenue, expenses and withdrawals.
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Assets = Liabilities +
Cash Supplies EquipmentAccountsPayable
NotesPayable
J. Scott,Capital Revenue
Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
(6) 3,000 3,000$
11,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$
28,200$ = 28,200$
Equity
Transaction Analysis
Rendered consulting servicesreceiving $3,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction Analysis
Paid salaries of $800 to employees.
Remember that the balance in the salariesexpense account actually increases.
But, equity actually decreases because
expenses reduce equity.
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Transaction Analysis
Assets = Liabilities +
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
(6) 3,000 3,000$
(7) (800) (800)$
10,200$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$ (800)$
27,400$ = 29,000$
Equity
Remember that expenses decreaseequity.
Paid salaries of $800 to employees.
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Transaction Analysis
J. Scott withdrew $500 from thebusiness for personal use.
Remember that the balance in the J. Scott,Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
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Transaction Analysis
Assets = Liabilities +
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
J. Scott,
Capital
J. Scott,
Withdrawal Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
(6) 3,000 3,000$
(7) (800) (800)$
(8) (500) (500)$
9,700$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (500)$ 3,000$ (800)$
26,900$ = 29,500$
Equity
Remember that withdrawals decreaseequity.
J. Scott withdrew $500 from thebusiness for personal use.
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Financial Statements
Lets prepare the Financial Statementsreflecting the transactions we have recorded.
1. Income Statement2. Statement of Owners Equity
3. Balance Sheet
4. Statement of Cash Flows
Scott Company
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Net incomeis thedifferencebetween
Revenues andExpenses.
Revenues:
Consulting revenue 3,000$Expenses:
Salaries expense 800
Net income 2,200$
Income Statement
For Month Ended December 31, 2004
The income statementdescribes acompanys revenues and expenses
along with the resulting net income orloss over a period of time due toearnings activities.
Scott Company
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The net incomeof $2,200increases
Scotts capital
by $2,200.
Revenues:
Consulting revenue 3,000$Expenses:
Salaries expense 800
Net income 2,200$
Income Statement
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004 -$
Plus: Investment by owner 20,000
Net income 2,200
Less: Withdrawals 500
J. Scott, Capital, Dec. 31, 2004 21,700$
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
The Statement ofOwners Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
Scott Company
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J. Scott, Capital, Dec. 1, 2004 -$
Plus: Investment by owner 20,000
Net income 2,200
Less: Withdrawals 500
J. Scott, Capital, Dec. 31, 2004 21,700$
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
Cash 9,700$ Accounts payable 1,200$Supplies 1,200 Notes payable 4,000
Equipment 16,000 Total liabilities 5,200
J. Scott, Capital 21,700
Total assets 26,900$ Total liabilities and equity 26,900$
Assets Liabilities & Equity
Scott Company
Balance Sheet
December 31, 2004
The Balance Sheetdescribes a
companysfinancial positionat a point in time.
Scott Company
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Cash flows from operating activities:
Cash received from clients 3,000$Purchase of supplies (1,000)
Cash paid to employees (800)
Net cash provided by operating activities 1,200$
Cash flows from investing activities:
Purchase of equipment (15,000)
Net cash used in investing activities (15,000)Cash flows from financing activities:
Investment by owner 20,000
Borrowed at bank 4,000
Withdrawal by owner (500)
Net cash provided by financing activities 23,500
Net increase in cash 9,700$Cash balance, December 1, 2004 -
Cash balance, December 31, 2004 9,700$
Statement of Cash Flows
For Month Ended December 31, 2004
The Statement of Cash Flowsidentifies cash