PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPAWinston Kwok, Ph.D., CPA
Chapter 1
Accounting in Business
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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IdentifyingSelect transactions and events
RecordingInput, measure and classify
CommunicatingPrepare, analyze and interpret
Importance of Accounting
Accounting
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Users of Accounting Information
External Users
•Lenders•Shareholders•Governments
•Consumer Groups•External Auditors•Customers
Internal Users
•Managers•Officers/Directors•Internal Auditors
•Sales Staff•Budget Officers•Controllers
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External Users
Financial accounting provides external users
with financial statements.
Internal Users
Managerial accounting provides information needs
for internal decision-makers.
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Users of Accounting Information
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Beliefs that distinguish right
from wrong
Accepted standards of good and bad
behavior
Ethics - A Key ConceptC 3
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Financial accounting practice is governed by concepts and rules known as generally accepted accounting
principles (GAAP).
Generally Accepted Accounting Principles
Relevant Information Affects the decision of its users.
Reliable Information Is trusted by users.
Comparable Information
Is helpful in contrasting organizations.
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The Securities and Exchange Commission is the government agency that establishes reporting requirements
for companies that issue stock or shares to the public.
Setting Accounting Principles
Financial Accounting Standards Board Financial Accounting Standards Board is the private group that sets both is the private group that sets both
broad and specific principles. broad and specific principles.
The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that
identify preferred accounting practices to create harmony among accounting practices of different countries.
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International Standards
The International Accounting Standards Board (IASB), an independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices.
IASBIASB
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Principles and Assumptionsof Accounting
Cost PrincipleAccounting information is based on
actual cost. Actual cost is considered objective.
Revenue Recognition Principle1. 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.
Matching PrincipleA company must record its expenses
incurred to generate the revenue reported.
Full Disclosure PrincipleA company is required to report the
details behind financial statements that would impact users’ decisions.
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Accounting Assumptions
Monetary Unit AssumptionExpress transactions and events in
monetary, or money, units.
Business Entity AssumptionA business is accounted for
separately from other business entities, including its owner.
Time Period AssumptionPresumes that the life of a company can
be divided into time periods, such as months and years.
Now Future
Going-Concern AssumptionReflects assumption that the business will continue operating instead of being
closed or sold.
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* Proprietorships and partnerships that are set up as LLCs provide limited liability.
Characteristics of Businesses
Characteristic Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
**
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Owners of a corporation are called shareholders (or stockholders). Shareholders are not personally liable for corporate acts. When a corporation issues only one class of shares, we
call it ordinary shares (or share capital).
CorporationC 4
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Transaction Analysis and the Accounting Equation
Assets = Liabilities + Equity
Accounting Equation
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Land
Equipment
Buildings
Cash
Vehicles
Store Supplies
Notes Receivable
Accounts Receivable
AssetsA 1
Resources owned or
controlled by a company
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Taxes Payable
Wages Payable
Notes Payable
Accounts Payable
Liabilities
Creditors’ claims on
assets
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Transaction Analysis Equation
The accounting equation MUST remain in balance after each transaction.
Liabilities EquityAssets = +
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Transaction 1: Investment by Owners
The accounts involved are:(1) Cash (asset)(2) Owner Capital (equity)
On December 1, Chas Taylor invests $30,000 cash to start a consulting business.
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Transaction 2: PurchaseSupplies for Cash
The accounts involved are:(1) Cash (asset)(2) Supplies (asset)
Chas Taylor’s company, FastForward purchases supplies paying $2,500 cash.
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Transaction 3: PurchaseEquipment for Cash
The accounts involved are:(1) Cash (asset) (2) Equipment (asset)
FastForward purchases equipment for $26,000 cash.
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Transaction 4: PurchaseSupplies on Credit
The accounts involved are:(1) Supplies (asset)(2) Accounts Payable (liability)
FastForward purchases Supplies of $7,100 on account.
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Transaction 5: ProvideServices for Cash
The accounts involved are:(1) Cash (asset) (2) Revenues (equity)
The company provides consulting services receiving $4,200 cash.
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Transaction 6 and 7: Paymentof Expenses in Cash
The accounts involved are:(1) Cash (asset) (2) Expenses (equity)
The company pays $1,000 rent and $700 in salary to the company’s only employee.
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Summary of Transactions
Other transactions were executed during December and the summary of all transactions is shown below:
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Financial StatementsLet’s prepare the financial statements reflecting the
transactions we have recorded.
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• Income statement (Statement of comprehensive income)
• Statement of changes in equity• Balance sheet (Statement of
financial position)• Statement of cash flows
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The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a
period of time due to earnings activities.
Income StatementP 2
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The Balance Sheet describes a company’s financial position at a point in time.
Balance SheetP 2
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Decision Analysis
Return on assets (ROA) is stated in ratio form as income divided by assets invested.
Net incomeAverage total assetsReturn on assets =
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1A Return and Risk AnalysisA 3
Many different returns may be reported.
ROA
Interest return on savings accounts.
Interest return on corporate bonds.
Risk is the uncertainty about the return we will
earn.
The lower the risk, the lower our expected return.
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1B - Business Activities and the Accounting Equation
There are three major types of activities in any organization:1.1.Financing Activities Financing Activities – Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans.2.2.Investing Activities Investing Activities - Are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.3.3.Operating Activities Operating Activities – Involve using resources to research, develop, and purchase, produce, distribute, and market products and services.
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