© 2007 Pearson Education Cana .1 Accounting and the Business Environment Chapter 1
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Accounting and theBusiness
EnvironmentChapter
1
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Define accounting, and describe the users of
accounting information.
Objective 1
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is an information system that...is an information system that...
measures business activities,measures business activities,
processes information, andprocesses information, and
communicates financial information.communicates financial information.
Accounting...
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is called the language of business.is called the language of business.
Accounting...
€£ $ ¥
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Business Decisions ...
Is my business making a profit?Is my business making a profit?
Should I hire assistants?Should I hire assistants?
Am I earning enough money to expand my business?
Am I earning enough money to expand my business?
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Users of Accounting Information
OtherOther
IndividualsIndividuals
InvestorsInvestors CreditorsCreditors
BusinessesBusinesses
Government Regulatory &
Taxing Agencies
Government Regulatory &
Taxing Agencies
Non-profit Organizations
Non-profit Organizations
Accounting Information
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Management AccountingManagement AccountingFinancial AccountingFinancial Accounting
Fields of Accounting
Provides information to people outside the
company
Provides information to people outside the
company
Provides information for internal decision makersProvides information for internal decision makers
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Explain why ethics and rules of conduct are
crucial in accounting and business.
Objective 2
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Ethical Consideration in Accounting and Business
Users need relevant and reliable information
Users need relevant and reliable information
Companies want to look as good as possible to
attract investors
Companies want to look as good as possible to
attract investors
Potential
for Conflict
Potential
for Conflict
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Chartered Accountants
(CA)
Chartered Accountants
(CA)
Certified Management Accountants
(CMA)
Certified Management Accountants
(CMA)
Certified General
Accountants(CGA)
Certified General
Accountants(CGA)
Professional Accounting Bodies and
Standards of Professional Conduct
Standards ofEthical
Conduct for each of the
professional organizations
Standards ofEthical
Conduct for each of the
professional organizations
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Describe and discuss the forms of business
organizations.
Objective 3
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ProprietorshipsProprietorships
PartnershipsPartnerships
CorporationsCorporations
Types of Business Organizations
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Proprietorships
What are some advantages?– one owner– business is separate from owner
What are some disadvantages?– limited life of organization– unlimited personal liability– limited credit standing
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Partnerships
What are some advantages?– better credit standing – possibly– more brain power, but consultation with
partners required What are some disadvantages?
– unlimited personal liability for general partners– need for written partnership agreement
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Corporations
What are some advantages?– separate legal existence– limited liability of shareholders– transferability of ownership relatively easy– indefinite life of organization
What are some disadvantages?– more costly to operate– extensive governmental regulation
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Explain the development of accounting standards,
and describe the concepts and principles.
Objective 4
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Development of AccountingStandards
Accounting Standards Board (AcSB) of the Canadian
Institute of Chartered Accountants (CICA)
Accounting Standards Board (AcSB) of the Canadian
Institute of Chartered Accountants (CICA)
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP)
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Conceptual Framework
Objective of financial reporting
Level 1
Qualitative characteristics of accounting information
Level 2
Elements of Financial StatementsLevel 3
Recognition and measurement criteriaLevel 4
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Level 1: Objective of Financial Reporting
To provide information useful for making investment and lending decisions.
To assess management’s stewardship.
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Level 2: Qualitative Characteristics
of Accounting Information
To be useful, information must be:– understandable;– relevant;– reliable;– comparable; and– consistent.
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Level 3: Elements of Financial Statements
Assets Liabilities Equity Revenues Gains Expenses Losses
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Level 4: Recognition andMeasurement Criteria
Assumptions
•Going Concern
•Monetary Unit
•Economic Entitty
•Time Period
Assumptions
•Going Concern
•Monetary Unit
•Economic Entitty
•Time Period
Principles
•Revenue Recognition
•Matching
•Full Disclosure
•Cost
Principles
•Revenue Recognition
•Matching
•Full Disclosure
•Cost
Constraints
•Cost/Benefit
•Materiality
Constraints
•Cost/Benefit
•Materiality
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The Economic Entity Assumption
Transactions of each entity are accounted for separately from the transactions of all other organizations and persons.
Example: Keep business transactions separate from the personal transactions of the owner.
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Information mustbe accurate and
verifiable.
Information mustbe accurate and
verifiable.
Information mustbe free from bias.Information mustbe free from bias.
Information must report what
actually happened.
Information must report what
actually happened.
Individuals wouldarrive at similar
conclusions usingsame data.
Individuals wouldarrive at similar
conclusions usingsame data.
The Reliability Characteristic
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Assets and servicesacquired
should be recordedat their actual cost.
Assets and servicesacquired
should be recordedat their actual cost.
The Cost Principle
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The entity will remain in
operation in the foreseeable future.
The entity will remain in
operation in the foreseeable future.
The Going-Concern Assumption
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The dollar’s purchasing power
is relativelystable.
The dollar’s purchasing power
is relativelystable.
The Stable-Monetary-Unit Assumption
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Describe and use the accounting equation to
analyze business transactions.
Objective 5
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EconomicResources
Claims toEconomicResources
The Accounting Equation
Assets = Liabilities + Owner’s Equity
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Asset
What is an asset? It is a resource owned that has future
benefit.– cash, office supplies, merchandise– furniture, land, buildings
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Liability
What is a liability? It is something a company owes.
– money– service – legal retainers– product – magazines
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Owner’s Equity
What is owner’s equity? It is what remains after liabilities have been
subtracted from assets.– the same as net assets– the owner’s claim on the entity’s assets
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Transactions that AffectOwner’s Equity
INCREASES DECREASES
Owner Investmentsin the Business
Revenues Expenses
Owner Withdrawalsfrom the Business
Owner’s Equity
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Revenues
What are revenues? They are amounts earned by delivering
goods or services to customers.– sales– performance of services– rent earned– interest earned
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Expenses
What are expenses? They are amounts that have been paid or
will be paid later for costs that have been incurred to earn revenue.– rent– salaries and wages– utilities– supplies used
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Accounting for Business Transactions
What is a transaction? It is an event that must always satisfy two
conditions:– it affects the financial position of the business;– it can be reliably recorded.
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Accounting for Business Transactions: An Example
1 John Lapp invests $60 000 to begin SuperTravel.
2 SuperTravel purchases land for an office location, paying $40 000 in cash.
3 SuperTravel buys office supplies, agreeing to pay $1 000 in 30 days.
4 SuperTravel earns and collects service revenue of $5 000.
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Accounting for Business Transactions
5 SuperTravel performs services, and the client agrees to pay $6 000 within one month.
6 During the month, SuperTravel pays $5 200 for expenses incurred.
7 SuperTravel pays $800 to the store from which it purchased $1 000 worth of supplies.
What is the effect of these transactions on the accounting equation?
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Owner’s Assets = Liabilities + Equity
1) Cash + $60 000 + $60 0002) Cash – 40 000
Land + 40 0003) Supplies + 1 000 + 1 0004) Cash + 5 000 + 5 0005) Receivable + 6 000 + 6 0006) Cash – 5 200 – 5 2007) Cash – 800 – 800Totals + $66 000 + 200 + $65 800
Accounting for Business Transactions
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Accounting for Business Transactions
Notice that the equation always stays in balance.
Each transaction affects at least two accounts, sometimes more.
Some transactions affect only one side of the equation; some affect both sides.
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Accounting for Business Transactions
Other transactions that took place were as follows:
8. Remodelled John Lapp’s personal residence.
9. The business collected $2 000 from the client.
10. SuperTravel sold some land at cost for $22 000.
11. John Lapp withdrew $2 000 from the business.
What is the effect of these additional transactions on the accounting equation?
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Prepare and evaluate the financial statements.
Objective 6
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... are the formal reports of an entity’s
financial information.
... are the formal reports of an entity’s
financial information.
... show how thebusiness is performing
and where it stands.
... show how thebusiness is performing
and where it stands.
Financial Statements...
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Financial Statements
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Cash Flow Statement
• Let’s look at the relationships among the financial statements
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SuperTravelIncome Statement
for the Month Ended April 30, 2007
Revenue:
Service revenue $11 000
Expenses:
Rent expense $2 200
Salary expense 2 400
Utilities expense 600
Total expenses 5 200 5 200
Net income $5 800
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John Lapp, Capital, April 1, 2007 $ 0
Investment by owner 60 000
Net income for the month 5 800
Withdrawalsby owner ( 2 000)
John Lapp, Capital, April 30, 2007 $63 800
SuperTravelStatement of Owner’s Equity
for the Month Ended April 30, 2007
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SuperTravelBalance SheetApril 30, 2007
Assets
Cash $ 41 000
Accounts receivable 4 000
Office supplies 1 000
Land 18 000
Total assets $ 64 000
Liabilities
Accounts payable $ 200
Owner’s Equity
J. Lapp, Capital 63 800
Total liabilities and
owner’s equity $ 64 000
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SuperTravel Cash Flow Statement
for the Month Ended April 30, 2007
Cash flows from operating activities:Cash collections from customers $7 000Cash payments to suppliers ( 3 600)
Cash payments to employees ( 2 400)Net cash inflow from operating activities $ 1 000
Cash flows from investing activitiesAcquisition of land ($40 000)Proceeds from sale of land 22 000Net cash outflow from investing activities ($ 18 000)
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Cash flows from financing activities:
Investment by owner $60 000
Withdrawal by owner ( 2 000)
Net cash inflow from financing activities $ 58 000
Net increase in cash $ 41 000
Cash balance, April 1, 2007 0
Cash balance, April 30, 2007 $41 000
SuperTravel Cash Flow Statement
for the Month Ended April 30, 2007 (continued)
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Analysis of the Financial Statements
Using the financial statements answer the following questions:
Did the business generate net income or a net loss?
What was the business’s largest expense? How much cash does the company have at the end
of April? How much does the company owe outsiders at
April 30?
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End of Chapter 1