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Learning Objectives
1. Nature of a Business
2. The Role of Accounting in Business
3. Business Ethics
4. Profession of Accounting
5. Generally Accepted Accounting Principles
6. Assets, Liabilities, and Owner’s Equity
7. Business Transactions
8. Financial Statements
9. Financial Analysis and Interpretation
Living in the Information Age
Data
Data
Communication
Communication News
News
Commentary
Commentary Facts
Facts
Access
Access
Living in the Information Age
Data
Data
Communication
Communication News
News
Timeliness
Independence
Freedom-of-
Commentary
Commentary Expression Facts
Facts
Access
Access
Business and Investment
Goal
Profit
Products
Business
Sells/
provi
des
Profit
Services
Accounting Information
Factors
Factors of
of
production
production are
are the
the
means
means businesses
businesses
use
use to
to make
make profit.
profit.
Land and Building
Sales
Sales
-- Expenses
Expenses Costs
Costsincurred
incurredwith
withsales
sales
Profit
Profit
Amounts
Amountsearned
earned
from
fromsales
salesless
less
expenses
expenses
incurred
incurred
1-1
Types of Businesses
Service
ServiceBusiness
Business Service
Service
The
The Walt
Walt Disney
Disney Company
Company Entertainment
Entertainment
Delta
Delta Air
Air Lines
Lines Transportation
Transportation
Marriott
Marriott International
International Hotels
Hospitality
Hospitality and
Hotels and
lodging
lodging
Bank
Bank of
of America
America Corporation
CorporationFinancial
Financial services
services
XM
XM Satellite
Satellite Radio
Radio Satellite
Satellite radio
radio
7
1-1
Types of Businesses
Merchandising
Merchandising Business
Business Product
Product
Wal-Mart
Wal-Mart General
General merchandise
merchandise
GameStop
GameStop Corporation
Corporation Video
Video games
games and
and
accessories
accessories
Best
Best Buy
Buy Consumer
Consumer electronics
electronics
Gap
Gap Inc.
Inc. Apparel
Apparel
Amazon.com
Amazon.com Internet
Internet books,
books, music,
music,
video
video
8
1-1
Types of Businesses
Manufacturing
Manufacturing Business
Business Product
Product
General
General Motors
Motors Corp.
Corp. Cars,
Cars, trucks,
trucks, vans
vans
Samsung
Samsung Cell
Cell phones
phones
Dell
Dell Inc.
Inc. Personal
Personal computers
computers
Nike
Nike Athletic
Athletic shoes
shoes and
and
apparel
apparel
The
The Coca-Cola
Coca-Cola Company
CompanyBeverages
Beverages
Sony
Sony Corporation
Corporation Stereos
Stereos and
and televisions
televisions
9
Exh.
1.4
Forms of Organization
Business
Law Offices
Sally’s
Grocery
Proprietorship
Partnership
Corporation
Limited liability company
11
1-1
12
1-1
A partnership is similar to a
proprietorship except that it is
owned by two or more individuals
and—
Comprises 10% of business
organizations in the United States.
Combines the skills and resources
of more than one person.
13
1-1
Continued
14
Corporation
16
1-1
Forms of Organization
Nonbusiness
Colleges Schools
Accounting
Accountingfor
forthese
theseorganizations
organizationsisis usually
usually aa fund-
fund-
based
basedsystem,
system,but
but the
thebasic
basicprinciples
principlesarearesimilar
similarto to
accounting
accountingforforbusiness
businessorganizations.
organizations.
1
20
Focus of Accounting
Identifying Recording
Economic Economic
Events Events
Reporting
and
Analyzing
Economic
Events
Influence of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that
Records
Records
information
Relevant
Relevant Communicates
Communicates
that is
Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
1
23
Accounting
Accounting —
— An
An Information
Information Process
Process
Identification
of Users
Users
Users of
of Accounting
Accounting Information
Information
investors
Financial Accounting creditors
regulators
EXTERNAL USERS customers
competitors
Users
Users of
of Accounting
Accounting Information
Information
• investors
Financial Accounting • creditors
EXTERNAL USERS
• regulators
• customers
• competitors
Managerial Accounting
owners
managers
INTERNAL USERS employees
1
Financial Accounting
The area of accounting that provides
external users with information is
called financial accounting.
The objective of financial accounting is
to provide relevant and timely
information for the decision-making
needs of users outside of the business.
1-27
1-27
27
1
Managerial Accounting
The area of accounting that provides
internal users with information is called
managerial accounting.
The objective of managerial accounting
is to provide relevant and timely
information for managers’ and
employees’ decision-making needs.
1-28
1-28
28
Accounting
Accounting —
— An
An Information
Information Process
Process
Identification
of Users
User
Information
Needs
Accounting
System
Accounting
Accounting —
— An
An Information
Information Process
Process
Identification
of Users
User
Information
Needs
User
Information
Needs
Reports
Accounting
Accounting —
— An
An Information
Information Process
Process
Identification
of Users
User
Information
Needs
User
Reports
Decisions
1
Exhibit 1 Users of Accounting Information
33
1
34
Ethics and Social Responsibility
Ethics
Beliefs that
Often coincide
separate right
with laws
from wrong Accepted
standards of
good and
bad
behavior
Guidelines for Ethical Decision
Making
Identify Analyze Make Ethical
Ethical Issues Options Decision
37
2
Cost Concept
Under the cost concept,
amounts are initially recorded
in the accounting records at
their cost or purchase price.
38
2
Example Exercise 1-1
Cost Concept
On August 25, Gallatin Repair Service extended an offer of
$125,000 for land that had been priced for sale at
$150,000. On September 3, Gallatin Repair Service
accepted the seller’s counteroffer of $137,000. On October
20, the land was assessed at a value of $98,000 for
property tax purposes. On December 4, Gallatin Repair
Service was offered $160,000 for the land by a national
retail chain. At what value should the land be recorded in
Gallatin Repair Service’s records?
1-28
39
Example Exercise 1-1 (continued)
2
Follow My Example 1-1
1-29
40
2
Objectivity Concept
41
2
42
Fundamental Principles of
Accounting
Business
Business Entity
Entity AAbusiness
businessisisaccounted
accountedforforseparately
separately
Principle from
fromits
itsowner
owneror
orowners.
owners.
Principle
Financial
Financialstatement
statementinformation
informationis
Objectivity
Objectivity supported
is
supportedbybyindependent,
independent,unbiased
unbiased
Principle
Principle evidence.
evidence.
Financial
Financialstatements
statementsare
arebased
basedon onactual
actual
Cost
Cost Principle
Principle costs
costsincurred
incurredininbusiness
businesstransactions.
transactions.
Going-Concern
Going-Concern AAbusiness
businesscontinues
continuesoperating
operatinginstead
insteadof
of
Principle being
beingclosed
closedor
orsold.
sold.
Principle
Monetary
Monetary Unit
Unit Express
Expresstransactions
transactionsand
andevents
eventsin
in
Principle monetary
monetaryunits.
units.
Principle
The Accounting Equation
Resources
The resources
owned by a
business
45
The Accounting Equation
Resources = Sources
Assets
Liabilities
Assets
Owner’s
Equity
Cost of Resources
resources used supplied by
in the business creditors and
owners
1-3
The Accounting Equation
The rights of
the creditors,
which
represent
debts of the
business
48
1-3
The Accounting Equation
The rights of
the owners
49
3
Example Exercise 1-2
Accounting Equation
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its accounting
period, December 31, 2009, You’re A Star has assets of
$800,000 and liabilities of $350,000. Using the accounting
equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.
b. Owner’s equity, as of December 31, 2010, assuming
that assets increased by $130,000 and liabilities
decreased by $25,000 during 2010.
1-34
50
Example Exercise 1-2 (continued)
3
Follow My Example 1-2
Example
1-35Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B
51
4
Business Transaction
A business transaction is an
economic event or condition that
directly changes an entity’s
financial condition or its results
of operations.
52
4
Transaction A
53
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Chris Clark,
Capital
25,000
Transaction Analysis
Chris Clark deposits $25,000 in a bank
account for NetSolutions.
The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Capital (equity)
Transaction Analysis
4
Transaction B
On November 5, 2009, NetSolutions
paid $20,000 for the purchase of land
as a future building site.
58
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(20,000)
= OWNER’S EQUITY
Land
20,000
Transaction Analysis
NetSolutions buys land for $20,000.
Transaction C
On November 10, 2009,
NetSolutions purchased supplies
for $1,350 and agreed to pay the
supplier in the near future.
63
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Accounts Payable
1,350
Supplies
1,350 = OWNER’S EQUITY
Transaction Analysis
NetSolutions buys supplies for
$1,350, agreeing to pay the supplier in
the near future.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction Analysis
4
Transaction D
On November 18, 2009, NetSolutions
received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This amount
is called Revenue.
68
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
7,500
= OWNER’S EQUITY
Fees Earned
7,500
Transaction Analysis
NetSolutions earns fees of $7,500,
receiving cash.
Expenses
During the month, NetSolutions
spent cash or used up other assets
in earning revenue. Assets used
in this process of earning revenue
are called expenses.
73
4
Transaction E
On November 30, 2009, NetSolutions
paid the following expenses during
the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous,
$275.
74
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(3,650)
= OWNER’S EQUITY
Expenses
(3,650)
Transaction Analysis
NetSolutions paid: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Transaction F
On November 30, 2009,
NetSolutions paid creditors on
account, $950.
79
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Accounts Payable
(950)
Cash
(950)
= OWNER’S EQUITY
Transaction Analysis
NetSolutions pays $950 to creditors
on account
The accounts involved are:
(1) Cash (asset)
(2) Accounts payable (liability)
Transaction Analysis
4
Transaction G
On November 30, 2009, Chris Clark
determined that the cost of supplies
on hand at the end of the period was
$550.
84
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Supplies
(800)
= OWNER’S EQUITY
Supplies Expense
(800)
Transaction Analysis
At the end of the month, the cost of supplies on
hand is $550.
Transaction H
89
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(2,000)
= OWNER’S EQUITY
Chris Clark,
Drawing
(2,000)
Transaction Analysis
Chris Clark withdraws $2,000 in cash
ASSETS LIABILITIES
ASSETS LIABILITIES
Accts. Payable 400
ASSETS LIABILITIES
Accts. Payable 400
OWNER’S EQUITY
decreased by
Owner’s withdrawals
Expenses
Effects
Effects of
of Transactions
Transactions on
on Owner’s
Owner’s Equity
Equity
OWNER’S EQUITY
increased by
Owner’s investments
Revenues
Effects
Effects of
of Transactions
Transactions on
on Owner’s
Owner’s Equity
Equity
OWNER’S EQUITY
decreased by increased by
Expenses Revenues
Effects
Effects of
of Transactions
Transactions on
on Owner’s
Owner’s Equity
Equity
OWNER’S EQUITY
decreased by increased by
Expenses Revenues
NET INCOME
4
101
4
Example Exercise 1-3
Transactions
Salvo Delivery Service is owned and operated by Joel
Salvo. The following selected transactions were completed
by Salvo Delivery Service during February:
1. Received cash from owner as additional investment,
$35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owner for personal use, $1,000.
1-63 (Continued)
102
Example Exercise 1-3 (continued)
4
1-64
103
Example Exercise 1-3 (continued)
4
Follow My Example 1-3
Follow My Example 1-3
105
5
Income Statement
Matching Concept
The matching concept is
applied by matching the
expenses with the revenue
generated during a period
by those expenses.
107
5
108
5
Exhibit 6 Financial Statements for NetSolutions
Income Statement
The assets and liabilities of Chickadee Travel Service at April 30,
2010, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Cellini, was $80,000 at May 1, 2009, the beginning of the current
year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950
Accounts receivable 31,350 Office expense 63,000
Cash 53,050 Supplies 3,350
Fees earned 263,200 Wages expense 131,700
Land 80,000
Prepare an income statement for the current year ended April
30, 2010.
1-72
113
Example Exercise 1-4 (continued)
5
Follow My Example 1-3
Follow My Example 1-4
1-1-
115 115
115
5
Exhibit 6 Financial Statements for NetSolutions (continued)
1-76
121
Example Exercise 1-5 continued
5
Follow My Example 1-5
Balance Sheet
A balance sheet is a list of
the assets, liabilities, and
owner’s equity as of a
specific date.
123
5
Account Form
The account form of a balance
sheet lists the assets on the left and
the liabilities and owner’s equity
on the right—similar to the design
of an account.
124
5
Exhibit 6 Financial Statements for NetSolutions (continued)
125
5
Example Exercise 1-6
Balance Sheet
Using the data for Chickadee Travel Service shown in Example Exercises 1-4
and 1-5, prepare the balance sheet as of April 30, 2010.
1-81
126
Example Exercise 1-6 (continued)
5
Follow My Example 1-3
Follow My Example 1-6
Assets
Cash $5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Owner’s Equity
Chris Clark, capital 26,050
Total liabilities and
owner’s equity $26,450
Financial
Financial Statements
Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Owner’s Equity
Chris Clark, capital 26,050
Total liabilities and
owner’s equity $26,450
Financial
Financial Statements
Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Owner’s Equity
Chris Clark, capital 26,050
Total liabilities and
owner’s equity $26,450
Financial
Financial Statements
Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Owner’s Equity
Chris Clark, capital 26,050
Total liabilities and
owner’s equity $26,450
5
132
5
Operating Activities
133
5
Investing Activities
134
5
Financing Activities
The cash flows from financing
activities section reports the cash
transactions related to cash
investments by the owner,
borrowings, and withdrawals by the
owner.
135
Transaction Analysis
Financial
Financial Statements
Statements
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2009
Interrelationships Among
Financial Statements
• The income statement and the statement of
owner’s equity are interrelated.
Net income or net loss
appears on both
statements.
143
5
Interrelationships Among
Financial Statements
• The statement of owner’s equity and the
balance sheet are interrelated.
The owner’s capital at the end of the
period on the statement of owner’s
equity also appears on the balance
sheet as owner’s capital.
144
5
Interrelationships Among
Financial Statements
• The balance sheet and the statement of
cash flows are interrelated.
The cash reported on the balance
sheet is also reported as the end-
of-period cash on the statement of
cash flows.
145
5
For NetSolutions:
146
147