Slide

1-1

1 Accounting in the
Information Age

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Living in the Information Age

Data
Data

Communication
Communication News
News

Commentary
Commentary Facts
Facts

Access
Access

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Living in the Information Age

Data
Data

Communication
Communication News
News
Timeliness
Independence
Freedom-of-
Commentary
Commentary Expression Facts
Facts

Access
Access

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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

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Business and Investment

Goal

Profit

Products
Business
Sells

Profit

Services
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Business Profit
Amounts
Amountsearned
earnedfrom
fromselling
selling
products
productsor
orservices
services

Sales
Sales
-- Expenses
Expenses Costs
Costsincurred
incurredwith
withsales
sales

Profit
Profit

Amounts
Amountsearned
earned
from
fromsales
salesless
less
expenses
expenses
incurred
incurred
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1-7 1.1

Nike’s Profit Breakdown

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Return and Risk

The
The lower
lower the
the risk
risk of
of our
our investment,
investment,
the
the lower
lower is
is our
our expected
expected return.
return.

Amount of
uncertainty
Profit  about the
Return Risk return we
Investment
$ ? expect to
earn

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1-9 1.2

Returns for Bonds with Different

Risks

Bonds
Bonds areare Exhibit
Exhibit1.2
1.2

written
written promises
promises U.S.
U.S.Treasury
Treasury

Bond Types
by
by organizations

Bond Types
Low
LowRisk
organizations Medium
Risk

MediumRisk
to
to repay
Risk
repay High
HighRisk
Risk

amounts
amounts loaned
loaned 0%
0% 2%
2% 4%
4% 6%
6% 8%
8% 10%
10%

to
to them
them with
Different Risk Levels

with
Different Risk Levels

interest.
interest. Source: The Wall Street Journal

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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

Accounting Information Labor and Equipment

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Focus of Accounting

 Identifying  Recording
Economic Economic
Events Events
 Reporting
and
Analyzing
Economic
Events

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Setting Accounting Rules

Unions
Unions AICPA
AICPA Lenders
Lenders
Securities
Securitiesand
and
Exchange
Exchange Investors
Investors Politicians
Politicians
Commission
Commission
Accountants
Accountants Others
Others

Provide input to

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Help set
Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles
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Accounting and Technology

Reduces
Reducestime,
time,effort
effort
and
andcost
cost of
of
recordkeeping.
recordkeeping.

Improves
Improves clerical
clerical
accuracy.
accuracy.

Changes
Changesthetheway
waywe we
store,
store,process
processand
and
Technology summarize
summarizelarge
large
masses
massesofofdata.
data.
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Forms of Organization

Business

Law Offices
Sally’s
Grocery

Proprietorship Partnership Corporation

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Forms of Organization

Nonbusiness

Government Nonprofit Private

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Characteristics of Business
Organizations

Characteristics
Characteristics Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
Business
Businessentity
entity yes
yes yes
yes yes
yes
Legal
Legal entity
entity no
no no
no yes
yes
Limited
Limited liability
liability no
no no
no* yes
yes
Unlimited
Unlimited life
life no
no no
no yes
yes
Business
Businesstaxed
taxed no
no no
no yes
yes
One
One owner
owner allowed
allowed yes
yes no
no yes
yes

**Limited
Limitedpartnerships
partnershipsandandlimited
limitedliability
liabilitypartnerships
partnerships
specifically
specificallyrestrict
restrictcertain
certainpartners’
partners’liabilities.
liabilities.

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Corporation

Owners of a corporation are called

shareholders (or stockholders).

When a corporation issues only

one class of stock, we call it
common stock (or capital stock).

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Nonbusiness Organization

Libraries Army Museums Hospitals

Colleges Schools

Airports Cities Prisons Shelters

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.
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Activities in Organizations
Financing
FinancingActivities
Activities
••Owner
Ownerfinancing
financing(equity)
(equity)
••Nonowner
Nonownerfinancing
financing
(liabilities)
(liabilities)

Financing

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Activities in Organizations
Investing
InvestingActivities
Activities
••Buying
Buyingresources
resources(assets)
(assets)
••Selling
Sellingresources
resources(assets)
(assets)

Investing Financing

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Activities in Organizations
Operating
Operatingactivities
activities
••Aimed
Aimedat
atselling
sellingproducts
products
and
andservices
services
••Result
Resultin
insales
salesand
andexpenses
expenses

Investing Financing

Operating
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Balance Sheet
AAbalance
balancesheet
sheetreports
reportson
oninvesting
investingandandfinancing.
financing. ItIt
lists
listsamounts
amountsfor forassets,
assets,liabilities,
liabilities,and
andequity
equityatataa
point
point in
intime.
time. The
Therelationship
relationshipis isreflected
reflectedin
inthe
the
Balance
BalanceSheet
Sheetequation:
equation:

Assets
Assets == Liabilities
Liabilities ++ Equity
Equity

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Income Statement
An
Anincomeincomestatement
statement reports
reportsonon operating
operatingactivities.
activities.
ItIt lists
listssales
sales(revenues),
(revenues),costs,
costs,and
and expenses
expensesover
over aa
period
period of
of time.
time. The
Therelationship
relationshipisisexpressed:
expressed:

Net
Net Income
Income == Revenues
Revenues -- Expenses
Expenses

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Statement of Changes in Owners’

Equity
This
Thisstatement
statementreports
reportschanges
changesininthe
the owners’
owners’claims
claims
on
onthe
thebusiness
businessover
overaa period
periodof
oftime.
time. ItIt includes
includes
changes
changesdue
dueto
toincome
incomeandandany
anyowner
ownercontributions
contributions
and
andwithdrawals
withdrawals(called
(called dividends
dividendsininaacorporation).
corporation).

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1-25 1.11

Statement of Cash Flows

The
Thestatement
statementofofcash
cashflows
flowsreports
reportson
oncash
cashflows
flowsfor
for
operating,
operating,investing,
investing,and
andfinancing
financingactivities
activitiesover
overaa
period
periodof
oftime.
time.

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Users of Accounting Information

Managerial
ManagerialAccounting
Accounting Financial
Financial Accounting
Accountingis
is
is
isaimed
aimedatat Internal
Internal aimed
aimed at
at External
ExternalUsers
Users
Users
Users

Lenders
Shareholders
Managers Government
Labor Unions
Officers External Auditors
Internal Auditors Customers

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Internal Operating Functions

Research & Development

Purchasing

Human Resources
Products
Production and
Services
Distribution

Marketing

Servicing
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Ethics and Social Responsibility

Ethics

Beliefs that
Often coincide
separate right
with laws
from wrong Accepted
standards of
good and
bad
behavior
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Guidelines for Ethical Decision

Making
 Identify  Analyze  Make Ethical
Ethical Issues Options Decision

Use personal Consider both Choose the best

ethics to the good and bad option after
recognize ethical consequences weighing all
issues. for all affected. consequences.

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Social Responsibility

 Donations to nonprofit
organizations
 Programs to reduce
pollution
 Programs to improve
worker and consumer
safety
 Paid time off for
workers

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Selected
Selected Opportunities
Opportunities in
in
Accounting
Accounting

Financial
Financial Managerial
Managerial Taxation
Taxation Accounting-
Accounting-
•Statement •General Accounting •Preparation
related
related
Preparation •Cost Accounting •Planning
•Lenders
•Statement Analysis •Budgeting •Regulatory
•Consultants
•Auditing •Internal Auditing •Investigations
•Analysts
•Regulatory •Management •Consulting
•Traders
•Consulting Consulting
•Managers
•Planning
•Directors
•Criminal Investigation
•Underwriters
•Planners
•Appraisers
•FBI Investigators

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Accounting Specialization

 Certified Public
Accountant (CPA)
 Certified Management
Accountant (CMA)
 Certified Internal
Auditor (CIA)
 Chartered Financial
Analyst (CFA)

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Return on Investment (ROI)

= Net income ÷ Avg total assets

ROI
ROI is
is viewed
viewed asas an
an
indicator
indicator ofof operating
operating
efficiency.
efficiency.

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End of Chapter 1

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