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ACCOUNTING FOR ACCOUNTING FOR MANAGERSMANAGERS
University of Management and Technology1901 North Fort Myer Drive
Arlington, VA 22209Voice: (703) 516-0035 Fax: (703) 516-0985
Website: www.umtweb.edu
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Carl S. WarrenCarl S. WarrenSurvey of AccountingSurvey of Accounting (2 (2ndnd ed.) ed.)
© 2004 South-Western© 2004 South-Western
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Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with
the permission of New the permission of New Vision Technology of Vision Technology of
Nepean Ontario, Canada.Nepean Ontario, Canada.
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Chapter 1Chapter 1
The Role of AccountingThe Role of Accountingin Businessin Business
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Learning ObjectivesLearning Objectives
1. Describe the types and forms of businesses, business strategies, value chains, and stakeholders.
2. Describe the three business activities of financing, investing, and operating.
3. Define accounting and explain its role in business.
4. Describe and illustrate the basic financial statements and how they interrelate.
5. Describe eight basic accounting concepts underlying financial reporting.
6. Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance.
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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1Describe the types and forms of businesses, business strategies, value chains, and stakeholders.
Learning ObjectiveLearning Objective
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ProductProduct ProductProduct
General Motors Automobiles, trucks, vansGeneral Mills Breakfast cerealsBoeing Jet aircraftNike Athletic shoesCoca-Cola BeveragesSony Stereos, televisions, radios
General Motors Automobiles, trucks, vansGeneral Mills Breakfast cerealsBoeing Jet aircraftNike Athletic shoesCoca-Cola BeveragesSony Stereos, televisions, radios
Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
Types of BusinessesTypes of Businesses
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Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProduct ProductProduct
Wal-Mart General merchandiseToys”R”Us ToysBarnes & Noble BooksBest Buy Consumer electronicsAmazon. Com Books
Types of BusinessesTypes of Businesses
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ServiceService ServiceService
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Service BusinessService BusinessService BusinessService Business
Types of BusinessesTypes of Businesses
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There are three forms of business
organizations
There are three forms of business
organizations
Proprietorship Partnership Corporation
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A proprietorship is owned by one
individual.
A proprietorship is owned by one
individual.
Advantages• Ease in organizing• Low cost of organizing
Disadvantages• Limited source of
financial resources• Unlimited liability
Doug’s
ProprietorshipProprietorship
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A partnership is owned two or
more individuals.
A partnership is owned two or
more individuals.
Advantages• More financial
resources than a proprietorship.
• Additional management skills.
Disadvantage• Unlimited liability.
Doug and Max’s
PartnershipPartnership
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A corporation is organized under state or federal statutes as a separate legal entity.
A corporation is organized under state or federal statutes as a separate legal entity.
Advantage• The ability to obtain
large amounts of resources issuing stocks.
Disadvantage• Double taxation.
D & M Inc.
CorporationCorporation
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70%
10%
20%
ProprietorshipPartnershipCorporation
Total Companies
Business Ownership in AmericaBusiness Ownership in America
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A business strategy is an integrated set of plans and actions designed to enable
the business to gain an advantage over its competitors, and to maximize profits.
Business StrategyBusiness Strategy
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Under a differentiation strategy, a business
designs and produces a product or service that
possess unique attributes or
characteristics for which customers are
willing to pay a premium price.
Differentiation StrategyDifferentiation Strategy
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A business stakeholder is a person or entity that has an interest in the economic
performance and well-being of a business.
A business stakeholder is a person or entity that has an interest in the economic
performance and well-being of a business.
Business StakeholdersBusiness Stakeholders
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STAKEHOLDERS
Internal:Stockholders ManagersEmployees
External:SuppliersCustomersStockholders
Business StakeholdersBusiness Stakeholders
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Business Stakeholders
Interest in the Business Examples
Capital market Providers of major Banks, owners, stakeholder financing for the stockholders
business
Product or service Buyers of products Customers and market stakeholders or services and vendors suppliers
to the business
Government Collectors of taxes and Federal, state, and stakeholder fees from the business city governments
and its employees
Internal stakeholders Individuals employed Employees and by the business managers
Business StakeholdersBusiness Stakeholders
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2Describe the three business activities of financing, investing, and operating.
Learning ObjectiveLearning Objective
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Financing activities involve obtaining funds to begin and operate a business.
Financing ActivitiesFinancing Activities
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Businesses seek financing by:borrowing
issuing shares of ownership
Financing ActivitiesFinancing Activities
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A liability is a legal obligation to repay the amount borrowed according to the
terms of the borrowing agreement.
Financing ActivitiesFinancing Activities
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Examples of Liabilities
• Accounts payable: When a business buys a service or product on credit.
• Bonds payable: When a business borrows money by issuing bonds.
• Interest payable: Any interest that is due on a note or a bond.
• Note payable: When a business issues commercial paper or borrows on a line of credit.
Financing ActivitiesFinancing Activities
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A business may also finance its operations by issuing shares of stock. The basic type of stock
is called common stock.
A business may also finance its operations by issuing shares of stock. The basic type of stock
is called common stock.
Financing ActivitiesFinancing Activities
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Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.
Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.
Investing ActivitiesInvesting Activities
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Assets are resources that the business
owns or are otherwise under its legal control and
available for use in the future.
Assets are resources that the business
owns or are otherwise under its legal control and
available for use in the future.
What are assets?What are assets?
Investing ActivitiesInvesting Activities
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When the business sells merchandise or services to a
customer, the right to collect is an account receivable.
When the business sells merchandise or services to a
customer, the right to collect is an account receivable.
Investing ActivitiesInvesting Activities
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Revenue is the increase in assets
from selling products or services.
Revenue is often identified according to its source, such as
Rent Revenue.
Revenue is the increase in assets
from selling products or services.
Revenue is often identified according to its source, such as
Rent Revenue.
What is revenue?What is revenue?
Operating ActivitiesOperating Activities
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An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary
operating activities of an organization.
An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary
operating activities of an organization.
What is an expense?
What is an expense?
Operating ActivitiesOperating Activities
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Revenues
- Expenses
= Net Income
Revenues
- Expenses
= Net Income
Operating ActivitiesOperating Activities
Net Income may be
positive (profit) or
negative (loss).
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Define accounting and its role in business.3
Learning ObjectiveLearning Objective
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Accounting is an information system that provides reports to
stakeholders about the economic activities and condition of a business.
Accounting is an information system that provides reports to
stakeholders about the economic activities and condition of a business.
What is accounting?What is accounting?
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1. To report the financial condition of a business at a point in time.
1. To report the financial condition of a business at a point in time.
2. To report changes in the financial condition of a business over a period of time.
2. To report changes in the financial condition of a business over a period of time.
Major objectives of financial Major objectives of financial accountingaccounting
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Describe and illustrate the basic financial statements and how they interrelate.
4Learning ObjectiveLearning Objective
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An income statement is a summary of the revenue and the expenses for a specific period of time.
An income statement is a summary of the revenue and the expenses for a specific period of time.
Objective:Objective:Objective:Objective:Reports Reports
change in change in financial financial conditioncondition
Reports Reports change in change in financial financial conditioncondition
Income StatementIncome Statement
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Hershey Foods CorporationIncome Statement
For the Year Ended December 31, 2001(in thousands)
Revenues:Sales $4,557,241
Expenses:Cost of sales $2,665,566Selling and administrative 1,269,964Other expenses 209,077Interest 69,093Income taxes 136,385 4,350,085
Net income $ 207,156
Note that the time period for the
statement is in the heading.
Note that the time period for the
statement is in the heading.
Income StatementIncome Statement
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The retained earnings statement reports changes in
financial condition due to changes in retained earnings.
The retained earnings statement reports changes in
financial condition due to changes in retained earnings.
Objective:Objective:Objective:Objective:Reports Reports
change in change in financial financial conditioncondition
Reports Reports change in change in financial financial conditioncondition
Retained Earnings StatementRetained Earnings Statement
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Hershey Foods CorporationRetained Earnings StatementFor the Year Ended December 31, 2001
(in thousands)
Retained earnings, January 1, 2001 $2,702,927Add net income $207,156Less dividends 154,750Increase in retained earnings 52,406Retained earnings, December 31, 2001 $2,755,333From the
income statement
From the income
statement
Again, note the time period
Again, note the time period
Retained Earnings StatementRetained Earnings Statement
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The balance sheet reports the financial condition as
of a point in time.
The balance sheet reports the financial condition as
of a point in time.
Objective:Objective:Objective:Objective:Reports Reports financial financial conditioncondition
Reports Reports financial financial conditioncondition
Balance SheetBalance Sheet
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AssetsAssets = (Claims) Rights to the Assets
Balance SheetBalance Sheet
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AssetsAssets = LiabilitiesLiabilitiesStock-
holders’ Equity
Stock-holders’ Equity
+
The rights of creditors
The rights of the stockholders
The The Accounting Accounting EquationEquation
The The Accounting Accounting EquationEquation
Balance SheetBalance Sheet
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Hershey Foods CorporationBalance SheetDecember 31, 2001
(in thousands)
AssetsCash $ 134,147Accounts receivable 361,726Inventories 512,134Prepaid expenses 62,595Property, plant, and equipment 1,534,901Intangibles 429,128Other assets 212,799Total assets $3,247,430
ContinuedContinuedContinuedContinued
Note that the date is a specific point
in time
Note that the date is a specific point
in time
Balance SheetBalance Sheet
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LiabilitiesAccounts payable $ 133,049Accrued liabilities 462,901Notes and other debt 1,245,939Income taxes 258,337
Total liabilities $2,100,226
Stockholders’ EquityCapital stock $ 183,213Retained earnings 2,755,333Repurchased stock and other equity items (1,791,342)
Total stockholders’ equity $1,147,204Total liabilities and stockholders’ equity $3,247,430
Matches total assetsMatches total assetsMatches total assetsMatches total assets
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The statement of cash flows reports the changes in financial condition due
to the changes in cash during a period.
The statement of cash flows reports the changes in financial condition due
to the changes in cash during a period.
Objective:Objective:Objective:Objective:Reports Reports
change in change in financial financial conditioncondition
Reports Reports change in change in financial financial conditioncondition
Statement of Cash FlowsStatement of Cash Flows
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Three categories on the statement of cash flow are:
Three categories on the statement of cash flow are:1. Operating activities
2. Investing activities
3. Financing activities
Statement of Cash FlowsStatement of Cash Flows
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Hershey Foods CorporationStatement of Cash Flows
For the Year Ended December 31, 2001(in thousands)
Net cash flows from operating activities $ 706,405Cash flows from investing activities:
Investments in property, plant, and equipment $(187,029)Proceeds from sale of property, plant, and equipment 63,042
Net cash flows used in investing activities $(123,987)Cash flows from financing activities:
Cash receipts from financing activities, including debt $ 30,589Dividends paid to stockholders (154,750)Repurchase of stock (40,322)Other, including repayment of debt (315,757)
Net cash flows used in financing activities $(480,240)Net increase in cash during 2001 $ 102,178Cash as of January 1, 2001 31,969Cash as of December 31, 2001 $ 134,147
Note the time periodNote the time period
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Describe eight basic accounting concepts underlying financial reporting.5
Learning ObjectiveLearning Objective
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The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.
The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.The cost concept
determines the amount initially entered into the accounting records for
purchases.
The cost concept determines the amount initially entered into the accounting records for
purchases.
Accounting ConceptsAccounting Concepts
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A business normally expects to continue operating for an indefinite period of time. This is known as the
going concern concept.
A business normally expects to continue operating for an indefinite period of time. This is known as the
going concern concept.Under the matching concept, revenues for a period are matched
with the expenses incurred in generating the revenue.
Under the matching concept, revenues for a period are matched
with the expenses incurred in generating the revenue.The objectivity concept requires
that entries in the accounting records and the data reported on financial statements be based on
objective evidence.
The objectivity concept requires that entries in the accounting
records and the data reported on financial statements be based on
objective evidence.
Accounting ConceptsAccounting Concepts
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The unit of measure concept requires that all economic data be
recorded in dollars.
The unit of measure concept requires that all economic data be
recorded in dollars.Financial statements should contain all relevant data a reader needs to
understand the financial condition and performance of a business. This is the adequate disclosure concept.
Financial statements should contain all relevant data a reader needs to
understand the financial condition and performance of a business. This is the adequate disclosure concept.
The accounting period concept is the process in which accounting
data are recorded and summarized in financial statements.
The accounting period concept is the process in which accounting
data are recorded and summarized in financial statements.
Accounting ConceptsAccounting Concepts
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DEC. 31
2003
Balance Sheet Dec. 31, 2003
Income statement for the
year ended December 31,
2003
Next slide
Financial History of a BusinessFinancial History of a Business
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DEC. 31
2004
Balance Sheet Dec. 31, 2004
Income statement for the
year ended December 31,
2004
Next slide
Financial History of a BusinessFinancial History of a Business
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DEC. 31
2005
Balance Sheet Dec. 31, 2005
Income statement for the
year ended December 31,
2005
Financial History of a BusinessFinancial History of a Business
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Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance.6
Learning ObjectiveLearning Objective
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Horizontal AnalysisHorizontal Analysis
Horizontal analysis compares each item on the most recent financial statement with the same item on one or more earlier financial statements.
When the financial statement period is one year, then the comparisons show the change year-on-year.
Year-on-year percentage changes are an important indicator of how well a firm is doing.
The general formula for computing the change in a value is:
(New Value - Old Value)Change% = × 100
Old Value
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Hershey Foods CorporationIncome Statement
For the Year Ended December 31, 2001 and 2000(in thousands)
Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)
2001 2000 Amount Percent
$336,265$4,220,976
8.0%
Horizontal AnalysisHorizontal Analysis
Increase (Decrease)
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Hershey Foods CorporationIncome Statement
For the Year Ended December 31, 2001 and 2000(in thousands)
Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)
2001 2000 Amount Percent
$194,415$2,471,151
8.0%7.9%
Horizontal AnalysisHorizontal Analysis
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Hershey Foods CorporationIncome Statement
For the Year Ended December 31, 2001 and 2000(in thousands)
Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)
2001 2000 Amount Percent8.0%7.9%8.1%
12.7%
(0.2)%
Horizontal AnalysisHorizontal Analysis