Accounting and the Business Environment Summary 1-1.

Accounting and the Business

Environment

Summary

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Learning Objectives

1. Explain why accounting is important and list the users of accounting information

2. Describe the organizations and rules that govern accounting

3. Describe the accounting equation, and define assets, liabilities, and equity

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Learning Objectives

4. Use the accounting equation to analyze transactions

5. Prepare financial statements

6. Use financial statements and return on assets (ROA) to evaluate business performance

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Learning Objective 1

Explain why accounting is

important and list the users of accounting

information

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Why Is Accounting Important?

Accounting is the information system that

measures business activities, processes the information into

reports, and communicates the results to decision

makers.

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Financial Accounting

Managerial Accounting

Users of Financial Information

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>TRY IT!

Benefit Definition1. Certified management accountants

a. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

2. Accounting b. Licensed professional accountants who serve the general public.

3. Managerial accounting c. Any person or business to whom a business owes money.4. Certified public accountants

d. The field of accounting that focuses on providing information for internal decision makers.

5. Financial accounting e. Certified professionals who work for a single company.

6. Creditorf. The field of accounting that focuses on providing information for external decision makers.

Match the accounting terminology to the definition

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Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accounting

3. Managerial accounting4. Certified public accountants

5. Financial accounting

6. Creditor

Match the accounting terminology to the definition

1-9

>TRY IT!

Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accounting4. Certified public accountants

5. Financial accounting

6. Creditor

Match the accounting terminology to the definition

1-10

>TRY IT!

Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accountingd. The field of accounting that focuses on providing information for internal decision makers.

4. Certified public accountants

5. Financial accounting

6. Creditor

Match the accounting terminology to the definition

1-11

>TRY IT!

Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accountingd. The field of accounting that focuses on providing information for internal decision makers.

4. Certified public accountants b. Licensed professional accountants who serve the general public.

5. Financial accounting

6. Creditor

Match the accounting terminology to the definition

1-12

>TRY IT!

Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accountingd. The field of accounting that focuses on providing information for internal decision makers.

4. Certified public accountants b. Licensed professional accountants who serve the general public.

5. Financial accountingf. The field of accounting that focuses on providing information for external decision makers.

6. Creditor

Match the accounting terminology to the definition

1-13

>TRY IT!

Benefit Definition1. Certified management accountants e. Certified professionals who work for a single company.

2. Accountinga. The information system that measures business activities, processes that information into reports, and communicates the results to decision makers.

3. Managerial accountingd. The field of accounting that focuses on providing information for internal decision makers.

4. Certified public accountants b. Licensed professional accountants who serve the general public.

5. Financial accountingf. The field of accounting that focuses on providing information for external decision makers.

6. Creditor c. Any person or business to whom a business owes money.

Match the accounting terminology to the definition

Learning Objective 2

Describe the organizations and rules that govern

accounting

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The Organizations That Govern Accounting

FASB• Financial Accounting

Standards Board• Privately funded• Creates the rules and

standards that govern financial accounting

SEC• Securities and

Exchange Commission

• Oversees the US financial markets

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Generally Accepted Accounting Principles (GAAP)

• Issued by the FASB.• Establishes the rules for

recording transactions and preparing financial statements.

• Published online as part of the Accounting Standards Codification.

• Requires that information be useful.

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Relevant = The info allows users to make

a decision.

Faithfully Representative =

The info is complete, neutral, and free

from material error.

Accounting Assumptions

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Economic Entity

Assumption

Cost Principle

Going Concern

Assumption

Monetary Unit

Assumption

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>TRY IT!Benefit Definition

7. Cost principlea. Oversees the creation and governance of accounting standards in the United States.

8. GAAP b. Requires an organization to be a separate economic unit.

9. Faithful representation c. Oversees US financial markets.

10. SECd. States that acquired assets and services should be recorded at their actual cost.

11. FASB e. Creates International Financial Reporting Standards.12. Monetary unit assumption f. The main US accounting rule book.13. Economic entiry assumption g. Assumes that an entity will remain in operation for the foreseeable future.14. Going concern assumption h. Assumes that the financial statements are recorded in a monetary unit.15. IASB i. Requires information to be complete, neutral, and free from material error.

Match the accounting terminology to the definition

7-19

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP

9. Faithful representation

10. SEC

11. FASB12. Monetary unit assumption13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-20

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation

10. SEC

11. FASB12. Monetary unit assumption13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-21

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC

11. FASB12. Monetary unit assumption13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-22

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC c. Oversees US financial markets.

11. FASB12. Monetary unit assumption13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-23

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC c. Oversees US financial markets.

11. FASBa. Oversees the creation and governance of accounting standards in the United States.

12. Monetary unit assumption13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-24

>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error

10. SEC c. Oversees US financial markets.

11. FASBa. Oversees the creation and governance of accounting standards in the United States.

12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit.13. Economic entiry assumption14. Going concern assumption15. IASB

Match the accounting terminology to the definition

7-25

>TRY IT!7. Cost principle

d. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC c. Oversees US financial markets.

11. FASBa. Oversees the creation and governance of accounting standards in the United States.

12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit.13. Economic entiry assumption b. Requires an organization to be a separate economic unit.14. Going concern assumption15. IASB

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>TRY IT!7. Cost principle

d. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC c. Oversees US financial markets.

11. FASBa. Oversees the creation and governance of accounting standards in the United States.

12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit.13. Economic entiry assumption b. Requires an organization to be a separate economic unit.14. Going concern assumption g. Assumes that an entity will remain in operation for the foreseeable future.15. IASB

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>TRY IT!Benefit Definition

7. Cost principled. States that acquired assets and services should be recorded at their actual cost.

8. GAAP f. The main US accounting rule book.

9. Faithful representation i. Requires information to be complete, neutral, and free from material error.

10. SEC c. Oversees US financial markets.

11. FASBa. Oversees the creation and governance of accounting standards in the United States.

12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit.13. Economic entiry assumption b. Requires an organization to be a separate economic unit.14. Going concern assumption g. Assumes that an entity will remain in operation for the foreseeable future.15. IASB e. Creates International Financial Reporting Standards.

Match the accounting terminology to the definition

Learning Objective 3

Describe the accounting equation,

and define assets, liabilities, and equity

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The Accounting Equation

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LiabilitiesLiabilitiesAssetsAssets = +

Rule: The Balance Sheet Equation must ALWAYS be in

balance.

EquityEquity

The Accounting Equation

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

Assets are economic

resources that are expected to benefit the

business in the future.

CashIn

ventory

Furniture

Land

The Accounting Equation

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LiabilitiesLiabilitiesAssetsAssets = +

Liabilities are debts that are owed to

creditors.

EquityEquity

Accounts PayableNotes

Payable Salaries Payable

The Accounting Equation

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LiabilitiesLiabilitiesAssetsAssets = +

Equity is the owner’s residual claim against the

assets of the company.

EquityEquity

Owner’s Capital

Owner’s With-

drawals

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LiabilitiesLiabilitiesAssetsAssets = + EquityEquity

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

The Accounting Equation

The owner’s claim on the resources

increase and decrease as the

company engages in earnings activities.

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LiabilitiesLiabilitiesAssetsAssets = + EquityEquity

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

The Accounting Equation

Revenues are economic

resources that have been earned by

delivering products or services to

customers.

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LiabilitiesLiabilitiesAssetsAssets = + EquityEquity

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

Owner’s Capital – Owner’s Withdrawals

+ Revenues - Expenses

The Accounting Equation

Expenses are the costs associated

with selling goods or services.

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Assets 71,288$ Liabilities 2,260 Owner's Capital ?Owner's Withdrawal 14,420 Revenues 53,085 Expenses 28,675

Using the expanded accounting equation, solve for the missing amount.

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Learning Objective 4

Use the accounting equation to analyze

transactions

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How Do You Analyze A Transaction?

Think of a transaction as a very special kind

of historical event.1. It involves the

exchange of economic resources.

2. We must be able to measure the economic

impact in monetary units.

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Is it a transaction?

Buying a copying machine for the office for $4,000

cash.

x Meeting with a potential customer.

How Do You Analyze A Transaction?

Sheena Bright starts a new business named Smart Touch. She puts $30,000 into the

business. How does this impact the Accounting Equation?

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Note: You can make the analysis easier if the first question you ask is whether cash exchanged hands.

How Do You Analyze A Transaction?

Next, Smart Touch purchases land for $20,000 cash.

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In this transaction, all the change occurred on the left side of the equation. One asset was converted into a different asset.

How Do You Analyze A Transaction?

In Transaction #3, Smart Touch buys $500 of office supplies, offering to pay in 30 days.

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Remember, in business it is quite common for a business to purchase something now, and pay for it later.

How Do You Analyze A Transaction?

In Transaction #4, Smart Touch provides training services to customers for $5,500 cash.

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How Do You Analyze A Transaction?

In Transaction #5, Smart Touch performs $3,000 of services for a customer who will pay

in one month.

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How Do You Analyze A Transaction?

In Transaction #6, Smart Touch pays $3,200 in cash expenses; $2,000 for office rent and

$1,200 for employee salaries.

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How Do You Analyze A Transaction?

In Transaction #7, Smart Touch pays $300 to the store from which it purchased office

supplies in Transaction #3.

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How Do You Analyze A Transaction?

In Transaction #8, Smart Touch collects $2,000 from the client for which Smart Touch performed services in Transaction #5.

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LO4: How Do You Analyze A Transaction?

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Learning Objective 5

Prepare Financial Statements

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Income Statement

Balance Sheet

These same four basic financial statements are

used by all companies as

the primary means of

communicating to stakeholders.

How Do You Prepare Financial Statements?

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Statement of Owner’s Equity

Statement of Cash Flows

Income Statement

Balance Sheet

How Do You Prepare Financial Statements?

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Reports the success or failure of the company’s operations for a period of time.

Reports the success or failure of the company’s operations for a period of time.

Statement of Owner’s Equity

Statement of Cash Flows

Revenues Service Revenue 8,500$ Expenses Rent expense 2,000$ Salaries Expense 1,200 Total expenses 3,200 Net income 5,300$

SMART TOUCH LEARNINGIncome Statement

Month Ended November 30, 2014

How Do You Prepare Financial Statements?

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Income Statement

Balance Sheet

How Do You Prepare Financial Statements?

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Shows amounts and causes of

changes in owner’s capital

during the period.

Statement of Owner’s Equity

Statement of Cash Flows

The ending balance in Bright Capital will also appear in the Equity section of the Balance Sheet.

How Do You Prepare Financial Statements?

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SMART TOUCH LEARNINGStatement of Owner's Equity

Month Ended November 30, 2014

Bright Capital, November 1, 2014 -$ Owner Contribution 30,000 Net income for the month 5,300

35,300 Owner Withdrawal (5,000) Bright Capital, November 30, 2014 30,300$

Income Statement

Balance Sheet

How Do You Prepare Financial Statements?

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Reports assets and claims to

those assets at a specific point in

time.

Reports assets and claims to

those assets at a specific point in

time.

Statement of Owner’s Equity

Statement of Cash Flows

SMART TOUCH LEARNINGBalance Sheet

November 30, 2014

Cash 9,000$ Accounts Receivable 1,000 Office Supplies 500 Land 20,000 Total assets 30,500$

Accounts Payable 200$

Bright Capital, November 30, 2014 30,300 Total Liabilities and Owner's Equity 30,500$

Assets

Liabilities

Owner's Equity

Note that the Balance Sheet follows the Accounting Equation.

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Income Statement

Statement of Owner’s Equity

Balance Sheet

Statement of Cash Flows

How Do You Prepare Financial Statements?

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Answers the question of whether the

business generates enough

cash to pay its bills.

Answers the question of whether the

business generates enough

cash to pay its bills.

SMART TOUCH LEARNINGStatement of Cash Flows

Month Ended November 30, 2014Cash Flows from Operating Activities: Receipts: Collections from customers 7,500$ Payments: For rent (2,000)$ For salaries (1,200) For office supplies (300) (3,500) Net cash provided by operating activities 4,000

Cash Flows from Investing Activities:Acquisition of land (20,000)

Net cash used by investing activities (20,000)

Cash Flows from Financing Activities: Owner contribution 30,000 Owner withdrawals (5,000)

Net cash provided by financing activities 25,000

Net increase in cash 9,000 Cash balance, November 1, 2014 - Cash balance, November 30, 2014 9,000$

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Learning Objective 6

Use financial statements and return

on assets (ROA) to evaluate business

performance

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How Do You Use Financial Statements to Evaluate Performance?

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