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Accounting in Business
Chapter 1
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.

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Accounting in Business

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Importance of Accounting

For example, the sale

by Apple of an iPhone.

Keep a chronological
log of transactions.

Prepare reports such as

financial statements.

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Users of Financial
Information
Accounting is called the
language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.

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Opportunities in Accounting

Accounting information is in all aspects of our lives. When

we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.

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Ethics A Key Concept

The goal of accounting is to provide useful
information for decisions. For information to be
useful, it must be trusted. This demands ethics in
accounting. Ethics are beliefs that distinguish
right from wrong. They are accepted standards of
good and bad behavior.

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Generally Accepted
Accounting Principles
(GAAP)

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Financial accounting is governed by concepts and

rules known as generally accepted accounting
principles (GAAP). GAAP aims to make
information relevant, reliable, and comparable.
Reliable information is
trusted by users.
Relevant information
affects decisions
of users.

Comparable information
is helpful in contrasting
organizations.

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Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.
Envision a way to commit
fraud with a low perceived
risk of getting caught

Fails to see the criminal

nature of the fraud or
justifies the action

Must have some pressure to

commit fraud, like unpaid bills

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International Standards
In todays global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
International Accounting
Standards Board (IASB)

International Financial
Reporting Standards (IFRS)

An independent group
(consisting of individuals
from many countries), issues
International Financial
Reporting Standards (IFRS)

Identify preferred accounting

practices

Differences between U.S. GAAP and IFRS are decreasing as the

FASB and IASB pursue a convergence process aimed to achieve a
single set of accounting standards for global use.

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Conceptual Framework and

Convergence

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Principles and
Assumptions of
Accounting

General principles are the

basic assumptions, concepts,
and guidelines for preparing
financial statements. General
principles stem from longused accounting practices.

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Specific principles are detailed

rules used in reporting
business transactions and
events. Specific principles
arise more often from the
rulings of authoritative

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Accounting Principles

Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective.

Matching Principle

Full Disclosure Principle

A company must record its expenses

incurred to generate the revenue
reported.

A company is required to report the details

behind financial statements that would
impact users decisions.

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Accounting Assumptions

Time Period Assumption

Presumes that the life of a company can
be divided into time periods, such as
months and years.

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Proprietorship, Partnership,
and Corporation

Here are some of the major attributes of proprietorships, partnerships,

and corporations:

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SarbanesOxley (SOX)
Congress passed the SarbanesOxley Act to help curb
financial abuses at
companies that issue their stock to the public. SOX
requires that these public companies apply both
accounting oversight and stringent internal controls.
The desired results include more transparency,
accountability, and truthfulness in reporting
transactions.

Dodd-Frank Wall Street

Reform and Consumer
Protection Act

The Act was designed to:

1. promote accountability and transparency in
the financial system,
2. put an end to the notion of too big to fail,
3. protect the taxpayer by ending bailouts,
and
4. protect consumers from abusive financial
services.

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Transaction Analysis and the

Accounting Equation
The Accounting Equation

Expanded Accounting Equation:

Net Income

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Transaction Analysis

Transaction 1
On December 1, Chas Taylor personally invests $30,000 cash in
FastForward and deposits the cash in a bank account opened
under the name of FastForward.

The accounts involved are:

(1) Cash (asset)
(2) Owner Capital (equity)

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Transaction Analysis

Transaction 2
FastForward uses $2,500 of its cash to buy supplies of brand
name footwear for performance testing over the next few
months.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

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Transaction Analysis

Transaction 3
FastForward spends $26,000 to acquire equipment for testing
footwear. This is an exchange of one asset, cash, for another
asset, equipment. The equipment is an asset because of its
expected future benefits from testing footwear.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

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Transaction Analysis

Transaction 4
Taylor decides more supplies of footwear and accessories are
needed. These additional supplies total $7,100, but as we see
from the accounting equation, FastForward has only $1,500 in
cash. Taylor arranges to purchase them on credit from CalTech
Supply Company.
The accounts involved are:

(1) Supplies (asset)

(2) Accounts Payable (liability)

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Transaction Analysis

Transaction 5
In one of its first jobs, FastForward provides consulting services
to a powerwalking club and immediately collects $4,200 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

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Transaction Analysis

Transaction 6 and 7
FastForward pays $1,000 rent and the biweekly $700 salary of
the companys only employee.

The accounts involved are:

(1) Cash (asset)
(2) Expenses (equity)

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Transaction Analysis

Transaction 8
FastForward provides consulting services of $1,600 and rents its
test facilities for $300 to a podiatric services center. The center
is billed for the $1,900 total. This transaction results in a new
asset, called accounts receivable, from this client.

The accounts involved are:

(1) Accounts Receivable (asset)
(2) Revenues (equity)

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Transaction Analysis

Transaction 9
The podiatric center pays $1,900 to FastForward 10 days after it
is billed for consulting services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts Receivable (asset)

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Transaction Analysis

Transaction 10
FastForward pays CalTech Supply $900 cash as partial payment
for its earlier $7,100 purchase of supplies, leaving $6,200
unpaid.

The accounts involved are:

(1) Cash (asset)
(2) Accounts Payable (liability)

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Transaction Analysis

Transaction 11
The owner of FastForward withdraws $200 cash for personal use.

The accounts involved are:

(1) Cash (asset)
(2) Withdrawals (equity)

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Summary of Transactions

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Financial Statements
The four financial statements and their purposes
are:
1. Income statement describes a companys
revenues and expenses along with the resulting
net income or loss over a period of time due to
earnings activities.
2. Statement of owners equity explains
changes in equity from net income (or loss) and
from any owner investments and withdrawals
over a period of time.
3. Balance sheet describes a companys
financial position (types and amounts of assets,
liabilities, and equity) at a point in time.
4. Statement of cash flows identifies cash
inflows (receipts) and cash outflows (payments)

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Income Statement
The income statement describes a companys revenues
and expenses along with the resulting net income or
loss over a period of time due to earnings activities.

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Statement of Owners
Equity

The statement of owners equity reports information about

how equity changes over the reporting period.

Net income
from the
income
statement.

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Balance Sheet
The balance sheet describes a companys financial
position at a point in time.

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Statement of Cash Flows

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Global View
Basic Principles
Neither U.S. GAAP nor IFRS specifies particular
account names nor the detail required. IFRS does
require certain minimum line items be reported in the
balance sheet along with other minimum disclosures
that U.S. GAAP does not.
On the other hand, U.S. GAAP requires disclosures for
the current and prior two years for the income
statement, statement of cash flows, and statement of
retained earnings (equity), while IFRS requires
disclosures for the current and prior year. Still, the
basic principles behind these two systems are similar.

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Global View
Transaction Analysis
Both U.S. GAAP and IFRS apply transaction analysis
identically as shown in this chapter. Although some
variations exist in revenue and expense recognition
and other principles, all of the transactions in this
chapter are accounted for identically under these two
systems.
It is often said that U.S. GAAP is more rules-based
whereas IFRS is more principles-based. The main
difference on the rules versus principles focus is with
the approach in deciding how to account for certain
transactions. Under U.S. GAAP, the approach is more
focused on strictly following the accounting rules;

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Global View
Financial Statements
Both U.S. GAAP and IFRS prepare the same four basic
financial statements. To illustrate, a condensed
version of Piaggios income statement follows
(numbers are in Euros thousands).

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Global View
Status of IFRS Adoption

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Return on Assets
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.
Return on assets =

Net income
Average total assets

Dell

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Appendix 1A
Return and Risk Analysis
Many different
returns may
be reported.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.

Risk is the
uncertainty about
the return we will
earn.
The lower the risk, the lower our expected return.

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Appendix 1B
Business Activities and the Accounting
Equation

Three major types of business activities:

Financing activities provide the means
organizations use to pay for resources
such as land, buildings, and equipment
to carry out plans.
Investing activities are the acquiring and
disposing of resources (assets) that an
organization uses to acquire and sell its
products or services.
Operating activities involve using
resources to research, develop,
purchase, produce, distribute, and
market products and services.

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End of Chapter 1