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Chapter 1

ACCOUNTING IN BUSINESS

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
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1

IMPORTANCE OF ACCOUNTING
Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff


•Shareholders •External Auditors •Officers/Directors •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

Financial accounting Managerial accounting


provides external users provides information needs
with financial statements. for internal decision-makers.
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C2
OPPORTUNITIES IN ACCOUNTING
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C3

ETHICS - A KEY CONCEPT

Ethics

Beliefs that Accepted standards


distinguish right of good and bad
from wrong behavior
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C3

ETHICS - A KEY CONCEPT


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C4 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Is helpful in contrasting


Information organizations.
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C4

SETTING ACCOUNTING PRINCIPLES

Financial Accounting Standards Board


is the private group that sets both
broad and specific principles.

The Securities and Exchange Commission is the


government agency that establishes reporting requirements
for companies that issue stock or shares to the public.

The International Accounting Standards Board (IASB)


issues International Financial Reporting Standards that
identify preferred accounting practices to create harmony
among accounting practices of different countries.
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C4

INTERNATIONAL STANDARDS

The International Accounting Standards Board (IASB), an


independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.

IASB
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C4 PRINCIPLES AND ASSUMPTIONS


OF ACCOUNTING

Revenue Recognition Principle


1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Full Disclosure Principle


Matching Principle
A company is required to report the
A company must record its expenses
details behind financial statements
incurred to generate the revenue reported.
that would impact users’ decisions.
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C4

ACCOUNTING ASSUMPTIONS

Now Future
Going-Concern Assumption Monetary Unit Assumption
Express transactions and events in
Reflects assumption that the business
monetary, or money, units.
will continue operating instead of
being closed or sold.

Business Entity Assumption Time Period Assumption


A business is accounted for Presumes that the life of a company can
separately from other business be divided into time periods, such as
entities, including its owner. months and years.
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C4

FORMS OF BUSINESS ENTITIES

Sole Partnership Corporation


Proprietorship
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C4

CHARACTERISTICS OF BUSINESSES
Characteristic Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes

* Proprietorships and partnerships that are


set up as LLCs provide limited liability.
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C4
CORPORATION

Owners of a corporation are called


shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of shares, we
call it ordinary shares (or share capital).
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A1 TRANSACTION ANALYSIS AND THE


ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity


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A1

ASSETS
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company

Store Buildings
Supplies
Equipment
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A1

LIABILITIES

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable
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A1

EQUITY
Owner’s
Claims on
Assets
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P1

TRANSACTION ANALYSIS EQUATION


The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity


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P1

TRANSACTION 1: INVESTMENT BY OWNERS


On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.

The accounts involved are:


(1) Cash (asset)
(2) Owner Capital (equity)
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P1 TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
Chas Taylor’s company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1 TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1 TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1 TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1 TRANSACTION 6 AND 7: PAYMENT


OF EXPENSES IN CASH
The company pays $1,000 rent and $700 in
salary to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
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P1

SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of
all transactions is shown below:
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P2

FINANCIAL STATEMENTS
Let’s prepare the financial statements reflecting
the transactions we have recorded.
• Income statement (Statement of
comprehensive income)
• Statement of changes in equity
• Balance sheet (Statement of
financial position)
• Statement of cash flows
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P2

INCOME STATEMENT

The income statement describes a company’s revenues and


expenses along with the resulting net income or loss over a
period of time due to earnings activities.
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P2
STATEMENT OF CHANGES IN EQUITY

FASTFORWARD
Statement of Changes in Equity
For Month Ended December 31, 2011
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P2

BALANCE SHEET
The Balance Sheet describes a company’s financial
position at a point in time.
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P2
STATEMENT OF CASH FLOWS
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A2

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

Net income
Return on assets =
Average total assets
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A3

1A RETURN AND RISK ANALYSIS


Risk is the
Many different
uncertainty about
returns may be
the return we will
reported.
earn.

The lower the risk, the lower our expected return.


ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
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C5

1B - BUSINESS ACTIVITIES AND THE


ACCOUNTING EQUATION
There are three major types of activities in any organization:
1.Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
3.Operating Activities – Involve using resources to research,
develop, and purchase, produce, distribute, and market
products and services.
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C6 1C - IASB’s Conceptual
Framework for Financial
Reporting
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END OF CHAPTER 1