CHAP 1 Introduction to Accounting and Business

8/8/2019 CHAP 1 Introduction to Accounting and Business

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ChapterChapter11

Introduction to AccountingIntroduction to Accountingand Businessand Business

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of Accounting

Pepperdine University

Copyright 2004 South-Western, a divisionof Thomson Learning. All rights reserved.

Task Force Image Galleryclip art included in thiselectronic presentation is used with the permission of

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1. Describe the nature of a business.

2. Describe the role of accounting in business.

3. Describe the importance of business ethics and

the basic principles of proper ethical conduct.

4. Describe the profession of accounting.

5. Summarize the development of accounting

principles and relate them to practice.6. State the accounting equation and define each

element of the equation.

ObjectivesObjectives

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:


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7. Explain how business transactions can be

stated in terms of the resulting change in the

basic elements of the accounting equation.

ObjectivesObjectives

8. Describe the financial statements of aproprietorship and explain how they interrelate.

9. Use the ratio of liabilities to owners equity to

analyze the ability of a business to withstand

poor business conditions.


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Manufacturing BusinessManufacturing Business

ProductProduct

General Motors Cars, trucks, vans

Intel Computer chips

Boeing Jet aircraft

Nike Athletic shoes and apparelCoca-Cola Beverages

Sony Stereos and television

Types of Businesses


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Merchandising BusinessMerchandising Business

ProductProduct

Wal-Mart General merchandise

Toys R Us Toys

Circuit City Consumer electronics

Lands End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses


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Service BusinessService Business

ProductProduct

Disney Entertainment

Delta Air Lines Transportation

Marriott Hotels Hospitality and lodging

Merrill Lynch Financial adviceSprint Telecommunication

Types of Businesses


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There are three types of

business organizations

Proprietorship Partnership

Corporation


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Aproprietorshipis owned by one

individual.

Advantages Ease in organizing

Low cost of

organizingDisadvantage

Limited source of

financial resources Unlimited liability

Joes


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Apartnership isowned by two or

more individuals.

Advantages

More financialresources than a

proprietorship.

Additionalmanagement skills.

Disadvantage

Unlimited liability.

Joe and Martys


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A corporation is

organized under stateor federal statutes as a

separate legal entity.

Advantage The ability to obtain

large amounts of

resources by issuingstocks.

Disadvantage

Double taxation.

J & M, Inc.


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Business StrategiesBusiness Strategies

A business strategy is an integrated

set of plans and actions designed to

enable the business to gain anadvantage over its competitors, and

in doing so, to maximize its profits.


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Under a low-cost strategy, a business

designs and produces products or

services of acceptable quality at a costlower than that of its competitors.

Wal-Mart

Southwest Airlines


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Under a differentialstrategy, a business

designs and produces products or services

that possess unique attributes orcharacteristics which customers are willing

to pay a premium price.

Maytag

Tommy Hilfiger


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Value Chain of a BusinessValue Chain of a Business

A value chain is the way a

business adds value for its

customers by processing inputsinto product or service.

InputsInputsBusinessBusiness

ProcessesProcesses

Products orProducts or

ServicesServices

CustomerCustomer

ValueValue


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A business stakeholderis a person or

entity having an interest in theeconomic performance of the business.

Business StakeholdersBusiness Stakeholders


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2Assessstakeholders

informational

needs.

The Process ofThe Process of

Providing InformationProviding InformationSTAKEHOLDERS

Internal:

Owners,

managers,employees

External:

Customers,

creditors,government1

Identify

stake-holders.


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Accounting

Information

System

Design the

accountinginformation

system to meet

stakeholders

needs.

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Record

economic

data about

business

activities

and events.

The Process ofThe Process of

Providing InformationProviding Information


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Business EthicsBusiness Ethics

1. Avoid small ethical lapses.

2. Focus on your long-term

reputation.

3. You may expect to suffer

adverse personal

consequences for holdingto an ethical position.

Sound

Principles thatform the

foundation for

ethical

behavior


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Profession of AccountingProfession of Accounting

Accountants employed by a business firm or

a not-for-profit organization are said to beengaged inprivate accounting.

Accountants and their staff who provide

services on a fee basis are said to beemployed inpublic accounting.


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G

enerallyAcceptedG

enerallyAcceptedAccountingAccounting

Principles (G

AAP)Principles (G

AAP)


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TheThe business entity conceptbusiness entity concept

limits the economic data inlimits the economic data inthe accounting system tothe accounting system to

data related directly to thedata related directly to the

activities of the business.activities of the business.The cost conceptis the

basis for entering the

exchange price, or costof an acquisition in the

accounting records.


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TheThe objectivity conceptobjectivity conceptrequires that the accountingrequires that the accounting

records and reports be basedrecords and reports be based

upon objective evidence.upon objective evidence.The unit-of-measure

conceptrequires that

economic data berecorded in dollars.


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The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owners Equity

The resourcesThe resources

owned by aowned by a

businessbusiness


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The rights of theThe rights of the

creditors, whichcreditors, which

represent debtsrepresent debtsof the businessof the business


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The rights of theThe rights of the

ownersowners


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What is a business

transaction?

Abusiness transaction is an economic event orcondition that directly changes an entitys financial

condition or directly affects its results of operations.


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On November 1,

2005, Chris

Clark begins abusiness that will

be known as

NetSolutions.


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a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions.account in the name of NetSolutions.

Chris Clark, Capital

25,000 Investment

by Chris

Clark

Cash

25,000a.

Assets Owners Equity=

=


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Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the

supplier in the near future (supplier in the near future (on accounton account).).

Owners

Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=


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d. NetSolutions provided services tod. NetSolutions provided services to

customers, earning fees of $7,500

andcustomers, earning fees of $7,500

andreceived the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500

d. + 7,500 + 7,500


AssetsOwners

Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees

earned

=

=


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e. 3,650 2,125

800

450

275

Wages

Rent

Util.

Misc.


Assets

e. NetSolutions paid the followinge. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

Owners


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal.8,850 1,350 20,000 1,350 28,850


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Assets

f. NetSolutions paid $950 tof. NetSolutions paid $950 to

creditors during the month.creditors during the month.

Owners


Bal. 8,850 1,350 20,000 1,350 28,850

f. 950 950

=

Bal. 7,900 1,350 20,000 400 28,850


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Assets

g. At the end of the month, the costg. At the end of the month, the cost

of supplies on hand is $550, soof supplies on hand is $550, so

$800 of supplies were used.$800 of supplies were used.

Owners


Bal. 7,900 1,350 20,000 400 28,850

g. 800 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies

expense


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Assets

h. At the end of the month, Chrish. At the end of the month, Chris

withdrew $2,000 in cash from thewithdrew $2,000 in cash from the

business for personal use.business for personal use.

Owners

Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050

h. 2,000 2,000

Bal. 5,900 550 20,000 400 26,050

With-

drawal

=

=


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Owners

withdrawals

Expenses

Decreased byDecreased by

Owners Equity

Effects ofTransactions on Owners EquityEffects ofTransactions on Owners Equity

Increased byIncreased by

Owners

investments

Revenues

Net

income


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Accounting reports, called

financialstatements,

provide summarizedinformation to the owner.


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Financial StatementsFinancial Statements

Income statementA summary of the revenue

and expenses for a specific period of time.

Statement of owners equityA summary of

the changes in the owners equity that haveoccurred during a specific period of time.

Balance sheetA list of the assets, liabilities,

and owners equity as of a specific date.

Statement of cash flowsA summary of the

cash receipts and disbursements for a specific

period of time.


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Fees earned $7 500 00

Operating expenses:

Rent expense

$2 12500Wages expense

80000

Supplies expense

45000Utilities expense

27500Miscellaneous expense

Total operating expenses 1 135 00

NetSolutions

Income Statement

For the Month Ended November 30, 2005

80000

Net income $3 050 00To the statementTo the statement

of owners equityof owners equity


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Chris Clark, capital, November 1, 2005 $ 0

NetSolutions

Statement of Owners Equity


Investment on November 1 $25000 00

Net income for November 3 050 00

$28 05000Less withdrawals 2 00000

Increase in owners equity 26 05000

Chris Clark, capital, November 30, 2005 $26 05000

From the incomeFrom the income

statementstatement

To theTo the

balance sheetbalance sheet


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Assets Liabilities

NetSolutions

Balance Sheet

November 30, 2005

Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Owners Equity

Land 20 000 00 Chris Clark, cap. 26 050 00

Total liabilities and

Total assets $26 450 00 owners equity $26 450 00

From theFrom the

statement ofstatement ofowners equityowners equity

This balance sheet presentedusing the account form


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When the balance sheet displays

the liabilities and owners equity

below the assets, the report form is

being used.


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Cash flows from operating activities:

Cash received from customers $ 7 50000

Deduct cash payments for expenses

and payments to creditors 4 60000

Net cash flow from operating activities 2 90000Cash flows from investing activities:

Cash payment for acquisition of land (2000000

Cash flows from financing activities:

Cash received as owners investment $25000 00

Deduct cash withdrawal by owner 2000 00

Net cash flow from financing activities 23 00000

Net cash flow and Nov. 30, 2005 cash bal. $ 5 90000

NetSolutions

Statement of Cash Flows


Should matchShould match CashCash on the balance sheeton the balance sheet

)


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Statement of Cash FlowsStatement of Cash Flows

Cash Flows from Operating ActivitiesThis section

reports a summary of cash receipts and cash payments

from operations.

Cash Flows from Investing ActivitiesThis section

reports the cash transactions for the acquisition and sale

of relatively permanent assets.

Cash Flows from Financing ActivitiesThis sectionreports the cash transactions related to cash

investments by the owner, borrowings, and cash

withdrawals by the owner.


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Ratio of liabilitiesto owners equity

= Total LiabilitiesTotal owners equity (or total

stockholders equity)

The ratio of liabilities to owners equity

allows owners like Chris Clark to analyzethe firms ability to withstand poor

business conditions.

Tools for FinancialTools for Financial

Analysis and InterpretationAnalysis and Interpretation


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Ratio of

liabilities to

owners equity =

$400

$26,050

Tools for FinancialTools for Financial

Analysis and InterpretationAnalysis and Interpretation

= 0.015Ratio of

liabilities to

owners equity


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The EndThe End

Chapter 1Chapter 1

CHAP 1 Introduction to Accounting and Business

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