Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Prepared by
Coby Harmon
University of California, Santa Barbara
1-1 Copyright ©2015 Pearson Education Inc. All rights reserved. Westmont College
3
Learning Objective
1. Explain why accounting is the language of

business
1-2 Copyright ©2015 Pearson Education Inc. All rights reserved.

EXPLAIN WHY ACCOUNTING IS THE
LANGUAGE OF BUSINESS
Accounting is an information system

 Measures business activities
 Processes data into reports
 Communicates results to decision makers
 Is “the language of business”

LO 1
EXPLAIN WHY ACCOUNTING IS THE
LANGUAGE OF BUSINESS
Exhibit 1-1 | The Flow of
Accounting Information
Business Companies
People make
transactions report their
decisions
occur results

LO 1
Who Uses Accounting Information?
 Manage personal bank accounts
Individuals
 Decide whether to rent or buy
 Budget monthly income and
Investors and expenditures
Creditors
Regulatory
Bodies
Nonprofit
Organizations

LO 1
Individuals
Investors and  Investors want to know how much

Creditors they can earn on an investment
 Creditors want to know when they
Regulatory are going to be paid
Bodies
Nonprofit
Organizations

LO 1
Individuals
Investors and
 Internal Revenue Service (IRS)
Creditors
requires businesses, individuals,
and other organizations to pay
Regulatory
taxes
Bodies
 U.S. Securities and Exchange
Nonprofit Commission (SEC) requires public
Organizations companies to provide financial
reports
LO 1
Individuals
Investors and
Creditors
Regulatory
Bodies
Nonprofit  File periodic reports with the IRS

Organizations and state governments

LO 1
Two Kinds of Accounting
Financial Accounting Managerial Accounting
For decision makers outside Information for managers

the entity  budgets
 investors  forecasts
 creditors  projections
 government agencies
 the public

LO 1
Organizing a Business
Exhibit 1-2 | The Various Forms of Business Organization
Proprietorship Partnership LLC Corporation
1. Owner(s) Proprietor-one Partners-two or Members Stockholders-

owner more owners generally many
owners
2. Personal Proprietor is General Members Stockholders

liability of personally liable partners are are not are not
owner(s) for personally personally personally
business liable; limited liable liable
debts partners are not

LO 1
Proprietorship
 Single owner
 Tend to be small retail stores or solo providers of
professional services
 Proprietor is personally liable for all the business’s debts
 Business records should not include the proprietor’s
personal finances

LO 1
Partnership
 Two or more parties as co-owners
 Income and losses “flow through” to the partners
 Many include retail establishments, professional service
firms, real estate, and oil and gas exploration companies
 General partnerships have mutual agency and unlimited
liability
 A limited-liability partnership lessens risk to the partners

LO 1
Limited-Liability Company (LLC)
 Business (not the owner) is liable for the company’s
debts
 May have one owner or many owners, called members
 Members have limited liability
 LLC’s income “flows through” to the members, just as if
they were partners

LO 1
Corporation
 A business owned by the stockholders
 Able to raise large sums of capital from issuance of
stock
 Formed under state law
 Legally distinct from its owners
 Stockholders have no personal obligation for the
corporation’s debts

continued LO 1
Corporation
 Double taxation
► Corporation pays income tax
► Shareholders taxed on dividend distributions
 Stockholders elect the board of directors, which
► Sets policy
► Appoints officers

LO 1
3
Learning Objective
2. Explain and apply underlying accounting

concepts, assumptions, and principles

EXPLAIN AND APPLY UNDERLYING
ACCOUNTING CONCEPTS, ASSUMPTIONS,
AND PRINCIPLES
Accountants follow professional frameworks for measurement
and disclosure of financial information.
 Generally Accepted Accounting Principles (GAAP)
 Financial Accounting Standards Board (FASB) formulates
GAAP

LO 2
Exhibit 1-3 | Conceptual
Foundations of Accounting
Accounting’s
Objective
Fundamental
Qualitative
Characteristics
Enhancing
Qualitative
Characteristics
Constraints
1-18 LO 2
Copyright ©2015 Pearson Education Inc. All rights reserved.
Accounting’s
Objective
Fundamental
Qualitative
Characteristics
To be relevant, information must

 Make a difference to the decision maker
Enhancing
Qualitative
 Help predict or confirm value
Characteristics
 Be material
Constraints

LO 2
Accounting’s
Objective
Fundamental
Qualitative
Characteristics
To make a faithful representation, the information must

 Be complete, neutral (free from bias), and free from error
Enhancing
Qualitative
 Focus on the economic substance of a transaction, event, or
Characteristics
circumstance
Constraints
Faithful representation makes the information reliable to users

LO 2
Enhancing
Qualitative
Characteristics
Comparability: Accounting information capable of being compared

Constraints
with information from other companies in the same period

LO 2
Enhancing
Qualitative
Characteristics
Verifiability: Information capable of being checked for accuracy,

Constraints
completeness, and reliability

LO 2
Enhancing
Qualitative
Characteristics
Timeliness: Information made available to users early enough to

Constraints
help them make decisions

LO 2
Enhancing
Qualitative
Characteristics
Understandability: Information sufficiently transparent so that it

Constraints
makes sense to reasonably informed users of the information
1-24 LO 2
Cost Constraint: Cost of disclosure should not exceed the

expected benefits to users
1-25 LO 2
Assumptions and Principles
Entity Assumption: Organization stands apart from other
organizations and individuals as a separate economic unit
Continuity (Going-Concern) Assumption: Entity will

remain in operation for the foreseeable future
Historical Cost Principle: Assets should be recorded at their

actual cost
Stable-Monetary-Unit Assumption: Effect of inflation is

ignored, based on the assumption that the dollar’s purchasing
power is relatively stable

LO 2
International Financial Reporting
Standards (IFRS)
 Developed by the IASB

 Used by many countries around the world
 Application of GAAP for public companies in the United
States is overseen by the U.S. Securities and Exchange
Commission (SEC)
 SEC is studying whether and how to require all U.S. public
companies to adopt some version of IFRS

LO 2
International Financial Reporting
Standards (IFRS)
 Having a uniform set of high-quality global accounting

standards makes financial statements more comparable
across borders
 Most commonly used accounting practices are essentially
the same under both U.S. GAAP and IFRS
 FASB is working hand-in-hand with the IASB toward
convergence of standards

LO 2
3
Learning Objective
3. Apply the accounting equation to business

organizations

APPLY THE ACCOUNTING EQUATION TO
BUSINESS ORGANIZATIONS
Assets and
Liabilities
Financial
statements are
based on the
accounting
equation
Exhibit 1-4 | The

Accounting Equation
1-30
Assets and Liabilities
• Economic resources
Assets • Expected future benefit
• Outsider claims
Liabilities • Expected future sacrifice
Owner’s • Insider claims

Equity • Stockholders’ interest in the assets

LO 3
Assets and Liabilities
What are some of The Gap, Inc.’s assets and liabilities?
Assets Liabilities
 Cash and cash  Accounts payable

equivalents  Federal and state income
 Inventories taxes payable
 Property, plant, and  Long-term debt
equipment  Current portion of long-
term debt

LO 3
Owners’ Equity
Owner’s
Assets Liabilities
Equity
The accounting equation can be written as

 Assets = Liabilities + Stockholders’ Equity
 Assets = Liabilities + Paid-in Capital + Retained Earnings

LO 3
Owners’ Equity
Stockholders’
Assets = Liabilities + Equity
Paid-in Capital
Common Stock
Paid-in capital: amount stockholders have invested in the

corporation

LO 3
Owners’ Equity
Stockholders’
Retained
Paid-in Capital + Earnings
Common Stock
Retained earnings: amount earned and kept for use in the

business

LO 3
Owners’ Equity
Stockholders’
Retained
Revenues: inflows of resources that

Revenues
increase retained earnings by
delivering goods or services to
customers
LO 3
Owners’ Equity
Stockholders’
Retained
Revenues - Expenses
Expenses: resource outflows that decrease retained

1-37
earnings due to operations LO 3
Owners’ Equity
Stockholders’
Retained
Revenues - Expenses - Dividends
Dividends: distributions to stockholders (usually cash)

1-38
generated by net income LO 3
Owners’ Equity
Expenses
decrease
Revenues Dividends
increase decrease
Retained
Earnings

LO 3
Owners’ Equity
Exhibit 1-5 | The Components of Retained Earnings

LO 3
Illustration
Blue Diamond Corporation has current assets of $360 million;
property, plant, and equipment of $600 million; and other assets
totaling $220 million. Current liabilities are $210 million and long-
term liabilities total $560 million.
Requirements
1. Use these data to write Blue Diamond Corporation’s
accounting equation.
2. How much in resources does Blue Diamond Corporation
have to work with?
3. How much does Blue Diamond Corporation owe creditors?
4. How much of the company’s assets do the Blue Diamond
1-41 Corporation stockholders actually own? LO 3
Illustration
term liabilities total $560 million. What are the company’s total
resources?
Stockholders’
$ 360 $ 210
600 560
220
$ 1,180 = $ 770 + $ 410
(Amount in millions)
1-42 LO 3
Illustration
term liabilities total $560 million. How much in resources does
Blue Diamond Corporation have to work with?
Stockholders’
$ 360 $ 210
600 560
220
$ 1,180 = $ 770 + $ 410
1-43 LO 3
Illustration
term liabilities total $560 million. How much does Blue Diamond
Corporation owe creditors?
Stockholders’
$ 360 $ 210
600 560
220
$ 1,180 = $ 770 + $ 410
1-44 LO 3
Illustration
term liabilities total $560 million. How much of the company’s
assets do the stockholders actually own?
Stockholders’
$ 360 $ 210
600 560
220
$ 1,180 = $ 770 + $ 410
1-45 LO 3
1-46 Advance slide in presentation mode to reveal answers. LO 3
3
Learning Objective
4. Evaluate business operations through the

financial statements
1-47
EVALUATE BUSINESS OPERATIONS Exhibit 1-6
THROUGH THE FINANCIAL STATEMENTS
Financial
Question Answer
Statement
Revenues
How well did the company
Income statement − Expenses
perform during the year?
Net income or (net loss)
Beginning retained earnings

Why did the company’s
Statement of + Net Income (-Net Loss)
retained earnings change
retained earnings − Dividends declared
during the year?
Ending retained earnings
What is the company’s

Assets = Liabilities + Owners’
financial position at year- Balance sheet
equity
end?
Operating cash flows

How much cash did the
Statement of cash +/− Investing cash flows
company generate and
flows +/− Financing cash flows
spend during the year?
Increase (decrease) in cash
1-48 Advance slide in presentation mode to reveal financial statement and answer. LO 4
EVALUATE BUSINESS OPERATIONS
THROUGH THE FINANCIAL STATEMENTS
Data flow from one financial statement to the next
Statement of
Income
Retained
Statement
Earnings
Statement of
Balance Sheet
Cash Flows

LO 4
The Income Statement Measures Operating
Performance
Income Statement
 Also called statement of operations
 Reports
► Revenues and gains
► Expenses and losses
► Bottom line of net income or net loss for the period
Net
Net Income
Income == Total
Total Revenues
Revenues and
and Gains
Gains -- Total
Total Expenses
Expenses and
and Losses
Losses

LO 4
The Income Statement Measures Operating
Performance
Exhibit 1-7 | The Gap, Inc., Consolidated Statements of Income

LO 4
The Statement of Retained Earnings Shows
What a Company Did with Its Net Income
Retained Earnings
 Portion of net income reinvested into the business
 Net income increases retained earnings
 Net losses and dividends decrease retained earnings
 Net income (net loss) flows from the income statement to
the statement of retained earnings
 Corporations not obligated to pay dividends

LO 4
The Statement of Retained Earnings Shows
What a Company Did with Its Net Income
Exhibit 1-8 | The Gap, Inc., Consolidated Statements of Retained Earnings

LO 4
The Balance Sheet Measures Financial
Position
Balance Sheet
 Also called statement of financial position
 Reports three items:
► Assets
► Liabilities
► Stockholders’ equity
 Dated at the moment in time when the accounting period
ends

LO 4
Assets on the Balance Sheet
Current Assets
 Expected to be converted to cash, sold, or consumed during

the next 12 months or within the business’s operating cycle
if longer than a year
Cash is the liquid asset
 Includes that’s the medium of
► Cash and cash equivalents exchange
Cash equivalents include
► Short-term investments money-market accounts or
► Accounts and notes receivable other financial instruments
that are easily convertible to
► Inventory cash
► Prepaid expenses
LO 4
Current Assets

 Includes
► Cash and cash equivalents Includes stocks and bonds
of other companies that the
► Short-term investments company intends to sell
► Accounts and notes receivable within the next year
► Inventory
LO 4
Current Assets

 Includes
► Cash and cash equivalents
► Short-term investments Amounts collectible from
► Accounts receivable customers from the sale of
goods and services
► Inventory
LO 4
Current Assets

 Includes
► Short-term investments
► Accounts receivable
Merchandise that a
► Inventory company sells to
customers
LO 4
Current Assets

 Includes
► Short-term investments
► Accounts receivable Amounts paid in
advance for costs that
► Inventory include advertising, rent,
insurance, and supplies
LO 4
Long-term Assets
 Expected to benefit the company for long periods of time

 Includes
Tangible assets that include
► Property and equipment land, buildings, computers,
and equipment
► Accumulated depreciation
► Long-term investments
► Intangibles

LO 4
Long-term Assets

 Includes
Amount of the historical cost
► Property and equipment
of plant assets that has been
► Accumulated depreciation allocated to expense in the
income statement over time
► Long-term investments as the asset has been
► Intangibles used in producing revenue

LO 4
Long-term Assets

 Includes
► Property and equipment
► Accumulated depreciation Includes stocks and bonds
of other companies that the
► Long-term investments
company does not intend to
► Intangibles sell within the next year

LO 4
Long-term Assets
Assets with no physical

form, such as patents,
trademarks, and goodwill
1-63 LO 4
Exhibit 1-9 | The Gap, Inc., Partial Consolidated Balance Sheets
1-64 LO 4
Liabilities on the Balance Sheet
Current Liabilities
 Debts payable in the next year or within the business’s

operating cycle if longer than a year
 Includes Amounts owed to vendors
► Accounts payable and suppliers for purchases
of inventory
► Income taxes payable
► Accrued expenses
► Current maturities of
long-term debt
1-65 LO 4
Current Liabilities

 Includes
► Accounts payable
Tax debts owed to the
► Income taxes payable government
► Accrued expenses
► Current maturities of
long-term debt

LO 4
Current Liabilities

 Includes
Includes other liabilities such
► Income taxes payable as interest payable on
borrowed money, accrued
► Accrued expenses liabilities for salaries,
► Current maturities of utilities, and other expenses
that are owed but have not
long-term debt
been paid

LO 4
Current Liabilities

 Includes
► Income taxes payable
► Accrued expenses Portion of long-term
liabilities that the company
► Current maturities of will have to pay off within the
long-term debt next year

LO 4
Long-term Liabilities
 Debts due beyond one year or the company’s normal

 Includes
► Long-term notes payable
► Bonds payable

LO 4

LO 4
Equity on the Balance Sheet
Stockholders’ Equity
 Represents the stockholders’ ownership of the business’s

assets
 Includes Amount represents the par
► Common stock value of the shares issued to
stockholders
► Additional paid-in capital
► Retained earnings
► Treasury stock
► Accumulated other comprehensive income (loss)

LO 4

assets
 Includes
► Common stock Amount of cash received on
initial sale of the company’s
stock in excess of the par
► Retained earnings value
► Treasury stock

LO 4

assets
 Includes
► Common stock
Portion of net income
► Retained earnings reinvested into the business
► Treasury stock

LO 4

assets
 Includes
► Common stock
► Retained earnings Amounts paid by the
► Treasury stock company to repurchase its
own stock
► Accumulated other
comprehensive income (loss)
LO 4

assets
 Includes
► Common stock
Items of gain or loss that are
► Retained earnings
allowed by the FASB to
► Treasury stock bypass the income
statement and be recorded
► Accumulated other directly into stockholders’
comprehensive income (loss) equity
LO 4

LO 4
The Statement of Cash Flows Measures
Cash Receipts and Payments
The Statement of Cash Flows reports three types of
activities
 Operating: Cash flows from selling goods and providing
services to customers
 Investing: Cash flows from the purchase and sale of
long-term assets
 Financing:
► Borrowing and repayment of borrowed funds
► Equity transactions, such as issuing stock, paying
dividends, and repurchase of company stock
LO 4
Exhibit 1-10 | The Gap, Inc.
1-78
Illustration
Assume SB Technology, Inc., is expanding into Australia. Identify
the financial statement where decision makers can find the
following information about SB Technology, Inc. In some cases,
more than one statement will report the needed data.
Financial Statement (s)
a. Revenue a. Income Statement
b. Dividends b. Statement of Retained Earnings,
Statement of Cash Flows
c. Current liabilities c. Balance Sheet
d. Total assets d. Balance Sheet
e. Selling, general, and e. Income Statement
1-79 administrative expense
LO 3
Illustration
Identify the financial statement where decision makers can find the
following information about SB Technology, Inc.
f. Ending cash f. Balance Sheet, Statement of

balance Cash Flows
g. Cash spent to g. Statement of Cash Flows
acquire a building
h. Ending balance of h. Balance Sheet, Statement of
retained earnings Retained Earnings
i. Net income i. Income Statement, Statement of
Retained Earnings, Statement of
1-80
Cash Flows LO 3
Illustration
Identify the financial statement where decision makers can find the
following information about SB Technology, Inc.
j. Income tax expense j. Income Statement
k. Common stock k. Balance Sheet
l. Income tax payable l. Balance Sheet
m. Long-term debt m. Balance Sheet
n. Adjustments to reconcile n. Statement of Cash Flows
net income to net cash
provided by operations

LO 3
3
Learning Objective
5. Construct financial statements and analyze the

relationships among them

CONSTRUCT FINANCIAL STATEMENTS AND
ANALYZE THE RELATIONSHIPS AMONG THEM
Income Statement
 Reports revenues (net sales) and expenses of the year
 Reports net income or net loss
► If revenues exceed expenses, there is net income
► If expenses exceed revenues, there is a net loss

LO 5
Statement of Retained Earnings

 Opens with the beginning retained earnings balance
 Adds net income (or subtracts net loss)
 Net income comes directly from the income statement
 Subtracts dividends declared
 Reports retained earnings balance at end of the year

LO 5
Balance Sheet
 Reports assets, liabilities, and stockholders’ equity at the
end of the year
 Reports that assets equal the sum of liabilities plus
stockholders’ equity
 Reports retained earnings, which comes from the statement
of retained earnings

LO 5
Statement of Cash Flows

 Reports cash flows from operating, investing, and
financing activities
 Each category results in net cash provided (an increase)
or used (a decrease)
 Reports whether cash and cash equivalents increased (or
decreased) during the year
 Shows the ending cash and cash equivalents balance

LO 5
Exhibit 1-11 | Relationships among the Financial Statements (in millions of $)

LO 5
Exhibit 1-11 | Relationships among the Financial Statements (in millions of $)
1-88 LO 5
Exhibit 1-11
1-89 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 5

What Do Decision
Makers Look For?
Question/Decision What to look for

Can the company sell its products? Sales revenue
Increasing or Decreasing?
What are the main income measures to Gross profit, Operating income, and
watch for trends? Net income
What percentage of sales revenue ends Divide net income by sales revenue
up as profit?
Can the company collect its receivables? Compare % increase in receivables

to % increase in sales
Can the company pay its liabilities? Compare assets to liabilities
Where is the company’s cash coming Observe the line items on the cash
from? flow statement

LO 5
3
Learning Objective
6. Evaluate business decisions ethically

EVALUATE BUSINESS DECISIONS
ETHICALLY
Decision should maximize the economic

Economics
benefits
Proposition that free societies are

Legal
governed by laws
Recognizes that while certain actions

Ethical might be both economically profitable
and legal, they may still not be right

LO 6
Decision
1. What is the issue?
2. Who are the stakeholders, and what are the consequences

of the decision to each?
3. Weigh the alternatives.
4. Make the decision and be prepared to deal with the

consequences.

LO 6
Copyright
This work is protected by United States copyright law and is

provided solely for the use of instructors in teaching their courses
and assessing student learning. Dissemination or sale of any part of
this work (including on the World Wide Web) will destroy the integrity
of the work and is not permitted. The work and materials from it
should never be made available to students except by instructors
using the accompanying text in their classes. All recipients of this
work are expected to abide by these restrictions and to honor the
intended pedagogical purposes and the needs of other instructors
who rely on these materials.

Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Загружено:

Авторское право:

Доступные форматы

Prepared by

1. Explain why accounting is the language of

1-2 Copyright ©2015 Pearson Education Inc. All rights reserved.

Accounting is an information system

1-3 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-4 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-5 Copyright ©2015 Pearson Education Inc. All rights reserved.

Investors and  Investors want to know how much

1-6 Copyright ©2015 Pearson Education Inc. All rights reserved.

Nonprofit  File periodic reports with the IRS

1-8 Copyright ©2015 Pearson Education Inc. All rights reserved.

For decision makers outside Information for managers

1-9 Copyright ©2015 Pearson Education Inc. All rights reserved.

Proprietorship Partnership LLC Corporation

1. Owner(s) Proprietor-one Partners-two or Members Stockholders-

2. Personal Proprietor is General Members Stockholders

1-10 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-11 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-12 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-13 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-14 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-15 Copyright ©2015 Pearson Education Inc. All rights reserved.

2. Explain and apply underlying accounting

1-16 Copyright ©2015 Pearson Education Inc. All rights reserved.

1-17 Copyright ©2015 Pearson Education Inc. All rights reserved.

To be relevant, information must

1-19 Copyright ©2015 Pearson Education Inc. All rights reserved.

To make a faithful representation, the information must

Faithful representation makes the information reliable to users

1-20 Copyright ©2015 Pearson Education Inc. All rights reserved.

Comparability: Accounting information capable of being compared

1-21 Copyright ©2015 Pearson Education Inc. All rights reserved.

Verifiability: Information capable of being checked for accuracy,

1-22 Copyright ©2015 Pearson Education Inc. All rights reserved.

Timeliness: Information made available to users early enough to

1-23 Copyright ©2015 Pearson Education Inc. All rights reserved.

Understandability: Information sufficiently transparent so that it

Cost Constraint: Cost of disclosure should not exceed the

Continuity (Going-Concern) Assumption: Entity will

Historical Cost Principle: Assets should be recorded at their

Stable-Monetary-Unit Assumption: Effect of inflation is

1-26 Copyright ©2015 Pearson Education Inc. All rights reserved.

 Developed by the IASB

1-27 Copyright ©2015 Pearson Education Inc. All rights reserved.

 Having a uniform set of high-quality global accounting

1-28 Copyright ©2015 Pearson Education Inc. All rights reserved.

3. Apply the accounting equation to business

1-29 Copyright ©2015 Pearson Education Inc. All rights reserved.

Exhibit 1-4 | The

Assets and Liabilities

Owner’s • Insider claims

1-31 Copyright ©2015 Pearson Education Inc. All rights reserved.

 Cash and cash  Accounts payable

1-32 Copyright ©2015 Pearson Education Inc. All rights reserved.

The accounting equation can be written as

1-33 Copyright ©2015 Pearson Education Inc. All rights reserved.

Paid-in capital: amount stockholders have invested in the

1-34 Copyright ©2015 Pearson Education Inc. All rights reserved.

Retained earnings: amount earned and kept for use in the

1-35 Copyright ©2015 Pearson Education Inc. All rights reserved.

Revenues: inflows of resources that

Expenses: resource outflows that decrease retained

Revenues - Expenses - Dividends