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Chapter2I ntroduction to Accounting
and BusinessAccounting, 21st Edition
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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.
Object ives
After studying this
chapter, you should
be able to:
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7. Explain how business transactions can bestated in terms of the resulting change in the
basic elements of the accounting equation.
Object ives
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owners equity to
analyze the ability of a business to withstand
poor business conditions.
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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 strategyis 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 business
designs and produces products or
services of acceptable quality at a costlower than that of its competitors.
Wal-Mart
Southwest Airlines
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Business Strategies
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.
Maytag
Tommy Hilfiger
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Value Chain of a Business
A value chainis the way a
business adds value for its
customers by processing inputsinto product or service.
Inputs
Business
Processes
Products or
Services
Customer
Value
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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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Business 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 thatform the
foundation for
ethical
behavior
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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 Accounting Equation
Assets = Liabilities + Owners Equity
The rights of the
creditors, which
represent debtsof the business
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The Accounting Equation
Assets = Liabilities + Owners Equity
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 November 1,
2005, Chris
Clark begins abusiness 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.
Chris Clark, Capital25,000 Investment
by Chris
Clark
Cash
25,000a.
Assets Owners Equity=
=
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b. NetSolutions exchanged $20,000 for land.
Chris Clark, Capital
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 Chris Clark,Cash + Supplies + Land Payable Capital
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. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
AssetsOwners
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees
earned
=
=
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e. 3,650 2,125
800
450
275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owners
Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
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Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid $950 to
creditors during the month.
Owners
Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850
f. 950 950
=
Bal. 7,900 1,350 20,000 400 28,850
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Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owners
Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850
g. 800 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense
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Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owners
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. 2,000 2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=
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Owners
withdrawals
Expenses
Decreased by
Owners Equity
Effects of Transactions on Owners Equity
Increased by
Owners
investments
Revenues
Net
income
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Accounting reports, called
f inancial statements,
provide summarizedinformation to the owner.
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Financial Statements
Income statementA summary of the revenueand expenses for a specific period of time.
Statement of owners equityA summary of
the changes in the owners equity that have
occurred during a specific period of time.
Balance sheetA list of the assets, liabilities,
and owners equity as of a specific date.
Statement of cash flowsA summary of the
cash receipts and disbursements for a 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 1 135 00
NetSolutions
Income Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00To the statement
of owners equity
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Chris Clark, capital, November 1, 2005 $ 0
NetSolutions
Statement of Owners Equity
For the Month Ended November 30, 2005Investment on November 1 $25 000 00
Net income for November 3 050 00
$28 050 00Less withdrawals 2 000 00
Increase in owners equity 26 050 00
Chris Clark, capital, November 30, 2005 $26 050 00
From the income
statement
To the
balance sheet
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Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owners Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owners equity $26 450 00
From the
statement ofowners equity
This balance sheet presentedusing the accountform
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When the balance sheet displays
the liabilities and owners equitybelow the assets, the reportformis
being used.
N S l i
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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 Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should match Cash on the balance sheet
)
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Statement of Cash Flows
Cash F lows from Operating Activities
This section
reports a summary of cash receipts and cash payments
from operations.
Cash F lows from Investing Activities
This sectionreports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash F lows from F inancing Activities
This sectionreports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
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Ratio of liabilitiesto owners equity
= Total LiabilitiesTotal owners equity (or total
stockholders equity)
The ratio of liabilities to owners equity
allows owners like Chris Clark to analyze
the firms ability to withstand poor
business conditions.
Tools for Financial
Analysis and Interpretation
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Ratio of
liabilities to
owners equity
=$400
$26,050
Tools for Financial
Analysis and Interpretation
= 0.015Ratio of
liabilities to
owners equity
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The End
Chapter 2
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