C1--1 Learning Objectives 1. Nature of a Business 2. The Role of Accounting in Business 3. Profession of Accounting 4. Generally Accepted Accounting Principles 5. Assets, Liabilities, and Owner’s Equity 6. Business Transactions 7. Financial Statements 8. Financial Analysis and Interpretation Ch 01 Introduction to accounting and business
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C1--1 Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Profession of Accounting 4.Generally Accepted Accounting Principles.
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C1--1
Learning Objectives
1. Nature of a Business
2. The Role of Accounting in Business
3. Profession of Accounting
4. Generally Accepted Accounting Principles
5. Assets, Liabilities, and Owner’s Equity
6. Business Transactions
7. Financial Statements
8. Financial Analysis and Interpretation
Ch 01 Introduction to accounting and business
C1--2
1. Nature of a Business
In general, a business is an organization in which basic resources(inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.
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2. The objective of a business
The objective of most businesses is to maximize profits.
Revenue – expense = profit
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3. The types of a business
Manufacturing business Merchandising business Service business
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three types :1. a proprietorship (not a legal entity)
2. a partnership (not a legal entity)
3. a corporation (a legal entity)
Example: The Coca-Cola Company has 3.5 billion shares of stock owned by stockholders.
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
decreased bydecreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
decreased bydecreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s investments
Revenues
increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased bydecreased by increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsBalance Sheet
November 30, 2002
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
)
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11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity
Ratio of liabilitiesto owner’s equity =
FormulaFormula
Objective: Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions and to pay its creditors.
Total liabilities
Total owner’s equity
NetSolutions =
ExampleExample
$400
$26,0500.015 or 1.5%
The lower the ratio of liabilities to owner’s equity, The better the financial position of the business.