Accounting and the Business Environment Chapter 1

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Objective 1

Use accounting vocabulary for decision making.

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Accounting...
is an information system that... measures business activities, processes information, and... communicates financial information.
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Accounting...

is called the language of business.

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Users of Accounting Information

External users make decisions about the entity.

Internal users make decisions for the entity.

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Fields of Accounting

Financial Accounting

Management Accounting
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The Authority Underlying Accounting

Public Sector (SEC) Private Sector (AICPA) (IMA) GAAP
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Private Sector (FASB)

Standards of Professional Conduct

AICPAs Code of Professional Conduct

Standards of Ethical Conduct of the Institute of Management Accountants

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Types of Business Organizations

Proprietorships Partnerships Corporations

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Proprietorships


What are some advantages? total undivided authority no restrictions on type of business must be legal  What are some disadvantages? unlimited liability limitation on size fund raising power
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Partnerships


What are some advantages? better credit standing possibly more brain power, but consultation with partners required  What are some disadvantages? unlimited personal liability for general partners need for written partnership agreement
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Corporations


What are some advantages? separate legal existence limited liability of stockholders transferability of ownership relatively easy  What are some disadvantages? taxes possible double taxation extensive governmental regulation
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Objective 2 Apply accounting concepts and principles to business situations.

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Generally Accepted Accounting Principles



What is the primary objective of financial reporting?

To provide information useful for making investment and lending decisions

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The Entity Concept Example

Assume that John decides to open up a gas station and coffee shop.  The gas station made $250,000 in profits, while the coffee shop lost $50,000.


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The Entity Concept Example

How much money did John make?  At a first glance, we would assume that John made $200,000.  However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.


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The Reliability (Objectivity) Principle

Information must be reasonably accurate. Information must report what actually happened.
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Information must be free from bias.

Individuals would arrive at similar conclusions using same data.

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The Cost Principle

Assets and services acquired should be recorded at their actual cost.

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The Going Concern Concept

The entity will continue to operate in the future.

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The Stable-Monetary-Unit Concept

The dollars purchasing power is relatively stable.

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Objective 3 Use the accounting equation to describe an organizations financial position.

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The Accounting Equation

Assets

Liabilities + Owners Equity

Economic Resources

Claims to Economic Resources

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Assets


What is an asset?  It is something a company owns which has future economic value. land building equipment goodwill
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Liability


What is a liability?  It is something a company owes. money service legal retainers product magazines

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Owners Equity


What is owners equity?  It is whats left of the assets after liabilities have been deducted. the same as net assets the owners claim on the entitys assets

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Transactions that Affect Owners Equity

OWNERS EQUITY INCREASES Owner Investments in the Business Owners Equity OWNERS EQUITY DECREASES Owner Withdrawals from the Business

Revenues
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Expenses
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Revenues


What are revenues?  They are amounts received or to be received from customers for sales of products or services. sales performance of services rent interest
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Expenses


What are expenses?  They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. salaries and wages utilities supplies used advertising
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Objective 4

Use the accounting equation to analyze business transactions.

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Accounting for Business Transactions

What is a transaction?  It is any event that both affects the financial position of the business and can be reliably recorded.


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Accounting for Business Transactions

1

Gay Gillen invests $30,000 to begin Gay Gillen eTravel. Gillen purchases an office location, paying $20,000 in cash. She buys office supplies, agreeing to pay $500 in 30 days. She earns and collects $5,500 revenues.
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Accounting for Business Transactions

Gillen performs services, and the client agrees to pay $3,000 within one month. 6 During the month, she pays $3,100 for expenses incurred. 7 Gillen pays $300 to the store from which she purchased $500 worth of supplies.  What is the effect of these transactions on the accounting equation?
5
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Accounting for Business Transactions

Owners Assets = Liabilities + Equity 1) Cash 2) Cash Land 3) Supplies 4) Cash 5) Receivable 6) Cash 7) Cash Totals
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+ $30,000 20,000 + 20,000 + 500 + 5,500 + 3,000 3,100 300 + $35,600

+ $30,000

+ 500 + + 300 + 200

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5,500 3,000 3,100

+ $35,400
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Accounting for Business Transactions

Notice that the equation always stays in balance.  Each transaction affects at least two accounts, sometimes more.  Some transactions affect only one side of the equation; some affect both sides.


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Accounting for Business Transactions

Other transactions that took place were as follows:  The business collected $1,000 from the client.  She sold some land at cost for $9,000.  She withdrew $2,100 from the business.


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Objective 5

Prepare and use financial statements.

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Financial Statements...
are the final product of the accounting process. tell how the business is performing and where it stands.
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Financial Statements

income statement statement of owners equity or retained earnings balance sheet statement of cash flows

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Objective 6

Evaluate the performance of business.

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Relationships Among the Statements: Income Statement

Revenue: Fees earned Expenses: Salary expense $1,200 Utilities and telephone expense 400 Equipment rental expense 400 Office rent expense 1,100 Net income
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$8,500

3,100 $5,400
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Relationships Among the Statements: Statement of Owners Equity

G. Gillen, capital, April 1, 20xx Contribution of capital Net income Cash distributions G. Gillen, capital, April 30, 20xx $ 0 30,000 $ 5,400 2,100 $33,300

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Relationships Among the Statements: Balance Sheet

Assets Cash Accounts receivable Supplies Land Total assets $ 20,000 2,000 500 11,000 $ 33,500 Liabilities Accounts payable Owners equity, G. Gillen, capital Total liabilities and owners equity $ 200

33,300 $33,500

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Relationships Among the Statements: Statement Of Cash Flows

Cash flows from operating activities: Cash receipts from services rendered Cash payments: Supplies $ 300 Operating expenses 3,100 Net cash flows from Operating activities Cash flows from investing activities Purchase and sale of land
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$6,500

3,400 $3,100 ($11,000)

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Relationships Among the Statements: Statement Of Cash Flows

Cash Flows from Financing Activities: Investment by Owner $30,000 Withdrawals 2,100 Net Cash Flows from Financing Activities $27,900 Cash at Beginning of Year 0 Cash at End of the Year $20,000
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End of Chapter 1

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