Chapter1IntroductiontoAccountingandBusinessAccounting,21stEditionWarrenReeveFessPowerPointPresentationbyDouglasCloud

ProfessorEmeritusofAccounting

PepperdineUniversity

? Copyright2004South-Western,adivisionofThomsonLearning.Allrightsreserved.TaskForceImageGalleryclipartincludedinthiselectronicpresentationisusedwiththepermissionofNVTechInc.Likerightnow.Someoftheactionhasbeenautomated,soclickthemousewhenyouseethislightingboltinthelowerright-handcornerofthescreen.Youcanpointandclickanywhereonthescreen.1.

Describethenatureofabusiness.2.

Describetheroleofaccountinginbusiness.3. Describetheimportanceofbusinessethicsandthebasicprinciplesofproperethicalconduct.4.

Describetheprofessionofaccounting.5.

Summarizethedevelopmentofaccountingprinciplesandrelatethemtopractice.6. Statetheaccountingequationanddefineeachelementoftheequation.ObjectivesAfterstudyingthischapter,youshouldbeableto:7. Explainhowbusinesstransactionscanbestatedintermsoftheresultingchangeinthebasicelementsoftheaccountingequation.Objectives8. Describethefinancialstatementsofaproprietorshipandexplainhowtheyinterrelate.9. Usetheratioofliabilitiestoowner’sequitytoanalyzetheabilityofabusinesstowithstandpoorbusinessconditions.Objective1NatureofABusiness1)Whatisbusiness?Abusinessisanorganizationin

whichbasicresources,suchasmaterialsandlabor,are

assembledandprocessedtoprovidegoodsorservices(outputs)tocustomers.MakegoodssellgoodssellservicesTypesofBusiness1)Manufacturingbusinesses-changebasicinputsintoproductsthataresoldtoindividualcustomers.

Example:2)Merchandisingbusinesses-sellproductstocustomers.

Example:3)Servicebusinesses-provideservicesratherthanproductstocustomers.

Example:ManufacturingBusiness

ProductGeneralMotors Cars,trucks,vansIntel ComputerchipsBoeing JetaircraftNike AthleticshoesandapparelCoca-Cola BeveragesSony StereosandtelevisionTypesofBusinessesMerchandisingBusiness

ProductWal-Mart GeneralmerchandiseToys“R”Us ToysCircuitCity ConsumerelectronicsLands’End ApparelA Internetbooks,music,video retailerTypesofBusinessesServiceBusiness

ProductDisney EntertainmentDeltaAirLines TransportationMarriottHotels HospitalityandlodgingMerrillLynch FinancialadviceSprint TelecommunicationTypesofBusinessesTherearethreetypesofbusinessorganizationsProprietorshipPartnershipCorporationAproprietorship

isownedbyoneindividual.AdvantagesEaseinorganizingLowcostoforganizingDisadvantageLimitedsourceoffinancialresourcesUnlimitedliabilityJoe’sApartnershipisownedbytwoormoreindividuals.AdvantagesMorefinancialresourcesthanaproprietorship.Additionalmanagementskills.DisadvantageUnlimitedliability.JoeandMarty’sAcorporationisorganizedunderstateorfederalstatutesasaseparatelegalentity.AdvantageTheabilitytoobtainlargeamountsofresourcesbyissuingstocks.DisadvantageDoubletaxation.J&M,Inc.BusinessStrategiesA

businessstrategyisanintegratedsetofplansandactionsdesignedtoenablethebusinesstogainanadvantageoveritscompetitors,andindoingso,tomaximizeitsprofits.BusinessStrategiesUndera

low-coststrategy,

abusinessdesignsandproducesproductsorservicesofacceptablequalityatacostlowerthanthatofitscompetitors.Wal-MartSouthwestAirlinesBusinessStrategiesUndera

differentialstrategy,

abusinessdesignsandproducesproductsorservicesthatpossessuniqueattributesorcharacteristicswhichcustomersarewillingtopayapremiumprice.MaytagTommyHilfigerValueChainofaBusinessAvaluechainisthewayabusinessaddsvalueforitscustomersbyprocessinginputsintoproductorservice.InputsBusinessProcessesProductsorServicesCustomerValueMorethan70%ofthebusinessesintheUnitedStatesareorganizedasproprietorships.About10%ofbusinessesareorganizedaspartnerships.About20%ofbusinessesareorganizedascorporations;however,theygenerateover90%ofthetotaldollarsofbusinessreceipts.Abusinessstakeholder

isapersonor

entityhavinganinterestintheeconomicperformanceofthebusiness.BusinessStakeholdersObjective2TheRoleofAccountinginBusiness1)GiveanideaofaccountingAccountingcanbedefinedasaninformationsystemthatprovidesreportstostakeholdersabouttheeconomicactivitiesandconditionofabusiness.Thegoalofaccountingcanbeillustratedusingthefollowingequation: GoalofAccounting=Record+Report+Interpreteconomicdataforusebydecisionmakers

InterestedIn

Reason1.Owner........SalesIsadvertisingeffective?ProfitCanItakehomemoremoneyeachweek? CashCanIaffordtobuymoreequipment?2.Investors/Stockholders..ProfitIsmyinvestmentmakingmoney? Dividends Whatdividendsarebeingpaid?3.Bankers....DebtsCanthisbusinessrepayaloan?4.IRS.....Profit Whattaxesdoesthisbusinessowe?5.Managers..ExpensesAmIkeepingexpenseswithinmybudget?SalesWillIbeeligibleforabonusthisyear?6.Employees..ProfitCanmycompanyaffordraises? Ismyjobsecure?7.Customers.AmountspentHowdependableisthisproduct? (onwarrantHowresponsiveistheservice claims) department?8.Competitors.(Amountspend(HowdoIcomparetomycompetitor?) onads)2Assessstakeholders’informationalneeds.TheProcessofProvidingInformationSTAKEHOLDERSInternal:Owners,managers,employeesExternal:Customers,creditors,government1Identifystake-holders.AccountingInformationSystemDesigntheaccountinginformationsystemtomeetstakeholders’needs.34Recordeconomicdataaboutbusinessactivitiesandevents.TheProcessofProvidingInformation5Prepareaccountingreportsforstakeholders.STAKEHOLDERSInternal:Owners,managers,employeesExternal:Customers,creditors,government

AccountingInformationSystemTheProcessofProvidingInformationBusinessEthics1. Avoidsmallethicallapses.2. Focusonyourlong-termreputation.3. Youmayexpecttosufferadversepersonalconsequencesforholdingtoanethicalposition.SoundPrinciplesthatformthefoundationforethicalbehaviorDiscussionCase:1.LaurenSmithisthecontrollerforSportsCentral.Shehasbeenaskedtorecommendasiteforanewstore.Laurenhasanunclewhoownsashoppingplazaintheareaoftownwherethenewstoreistobelocated,soshedecidestocontactheruncleaboutleasingspaceinhisplaza.Laurenalsocontactedseveralothershoppingplazasandmalls,butheruncle'sstoreturnedouttobethemosteconomicalplacetolease.Therefore,Laurenrecommendedlocatingthenewstoreinheruncle'sshoppingplaza.Inmakingherrecommendationtomanagement,shedidnotdisclosethatheruncleownstheshoppingplaza.ProfessionofAccountingAccountantsemployedbyabusinessfirmoranot-for-profitorganizationaresaidtobeengagedinprivateaccounting.Accountantsandtheirstaffwhoprovideservicesonafeebasisaresaidtobeemployedinpublicaccounting.EXTERNALUSERSFinancialAccountinginvestorscreditorsregulatorscustomerscompetitorsownersmanagersemployeesINTERNALUSERSManagerial

AccountingUsersofAccountingInformationEXTERNALUSERSFinancialAccountinginvestorscreditorsregulatorscustomerscompetitorsUsersofAccountingInformation

Whatarethestartingratesfornewgraduates?GovernmentIndustryCPAFirmsCollegeGraduatesObjective4:TheAccountingProfession–P9AuditorStaffAccountantJuniorAccountantGovernmentIndustryCPAFirmsStaffAccountantJuniorAccountantAuditorCollegeGraduates

HowsoonwouldIgetpromoted?TheAccountingProfessionSeniorAccountantSupervisorChiefAccountant

Whatarethetoppositionsineachcategory?GovernmentIndustryCPAFirmsChiefAccountantStaffAccountantSeniorAccountantJuniorAccountantSupervisorAuditorCollegeGraduatesTheAccountingProfessionControllerManagerDirector

Whatisthefastestpathtotopmanagement?GovernmentAdministratorIndustryVicePresidentFinanceCPAFirmsChiefAccountantStaffAccountantControllerPartnerManagerSeniorAccountantJuniorAccountantDirectorSupervisorAuditorCollegeGraduatesTheAccountingProfession

10to20yearsofexperience1GovernmentTheAccountingProfessionAdministratorIndustryVicePresidentFinanceCPAFirms1

6to8yearsofexperience2ChiefAccountantStaffAccountantControllerPartnerManagerSeniorAccountantJuniorAccountant2DirectorSupervisorAuditorCollegeGraduatesObjective5GAAP1)FASBistheauthoritativebodyhavingtheprimaryresponsibilityfordevelopingaccountingprinciples.2)TheprincipleofAccountingProcess:1929crisis1932Principle1934SEC1938CAP1959APB1973FASBGenerallyAcceptedAccountingPrinciples(GAAP)Thebusinessentityconceptlimitstheeconomicdataintheaccountingsystemtodatarelateddirectlytotheactivitiesofthebusiness.Thecostconceptisthebasisforenteringtheexchangeprice,orcostofanacquisitionintheaccountingrecords.BusinessentityconceptTheindividualbusinessunitisthebusinessentityforwhicheconomicdataareneededIfanindividualownedadrycleaner,avideostore,andagasstation,howwouldtheownerknowtheprofitabilityofeach?Thecostconcept1)whattheircomputer(orotherasset)costandwhatitiscurrentlyworth.whichvalueismoreobjectiveTheobjectivityconceptrequiresthataccountingrecordsbebasedonobjective(verifiable)evidence.

2)JasonThompsonpurchasedanofficebuilding10yearsagofor$780,000.Thebuildingwasjustappraisedat$1.25million.WhatvalueshouldbeusedforthebuildinginJason'saccountingrecords?Theobjectivityconceptrequiresthattheaccountingrecordsandreportsbebaseduponobjectiveevidence.Theunit-of-measureconceptrequiresthateconomicdataberecordedindollars.ResourcesObjective6:Assets,Liabilities&TheAccountingEquation

Whatareanorganization’sresourcescalled?AssetsResources=SourcesTheAccountingEquationWhatarethesourcesoftheassets?CostofresourcesusedinthebusinessAssetsLiabilitiesOwner’sEquityResources=SourcesCostofresourcesusedinthebusinessResourcessuppliedbycreditorsandownersTheAccountingEquationa. ChrisClarkdeposits$25,000inabankaccount forNetSolutions.ASSETS=Objective7:BusinessTransactionsOWNER’SEQUITYLIABILITIESa. ChrisClarkdeposits$25,000inabankaccount forNetSolutions.ASSETS=BusinessTransactionsOWNER’SEQUITYCash25,000LIABILITIESa. ChrisClarkdeposits$25,000inabankaccount forNetSolutions.ASSETS=BusinessTransactionsOWNER’SEQUITYCash25,000LIABILITIESChrisClark,Capital25,000BusinessTransactionsb. NetSolutionsbuyslandfor$20,000.ASSETS=OWNER’SEQUITYLIABILITIESBusinessTransactionsb. NetSolutionsbuyslandfor$20,000.ASSETS=OWNER’SEQUITYLIABILITIESCash(20,000)BusinessTransactionsb. NetSolutionsbuyslandfor$20,000.ASSETS=OWNER’SEQUITYLIABILITIESCash(20,000)Land20,000BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESc. NetSolutionsbuyssuppliesfor$1,350,agreeingto paythesupplierinthenearfuture.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESSupplies1,350c. NetSolutionsbuyssuppliesfor$1,350,agreeingto paythesupplierinthenearfuture.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESc. NetSolutionsbuyssuppliesfor$1,350,agreeingto paythesupplierinthenearfuture.AccountsPayable1,350Supplies1,350BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESd. NetSolutionsearnsfeesof$7,500,receivingcash.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash7,500d. NetSolutionsearnsfeesof$7,500,receivingcash.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash7,500FeesEarned7,500d. NetSolutionsearnsfeesof$7,500,receivingcash.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESe. NetSolutionspaid:wages,$2,125;rent,$800; utilities,$450;andmiscellaneous,$275.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(3,650)e. NetSolutionspaid:wages,$2,125;rent,$800; utilities,$450;andmiscellaneous,$275.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(3,650)Expenses(3,650)e. NetSolutionspaid:wages,$2,125;rent,$800; utilities,$450;andmiscellaneous,$275.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESf. NetSolutionspays$950tocreditorsonaccount.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(950)f. NetSolutionspays$950tocreditorsonaccount.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(950)AccountsPayable(950)f. NetSolutionspays$950tocreditorsonaccount.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESg. Attheendofthemonth,thecostofsupplieson handis$550.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESSupplies(800)g. Attheendofthemonth,thecostofsupplieson handis$550.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESSupplies(800)SuppliesExpense(800)g. Attheendofthemonth,thecostofsupplieson handis$550.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESh. ChrisClarkwithdraws$2,000incash.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(2,000)h. ChrisClarkwithdraws$2,000incash.BusinessTransactionsASSETS=OWNER’SEQUITYLIABILITIESCash(2,000)ChrisClark,Drawing(2,000)h. ChrisClarkwithdraws$2,000incash.TransactionSummaryASSETS=OWNER’SEQUITYLIABILITIESCash 5,900Supplies 550Land 20,000TransactionSummaryASSETS=OWNER’SEQUITYLIABILITIESCash 5,900Supplies 550Land 20,000Accts.Payable 400TransactionSummaryASSETS=OWNER’SEQUITYLIABILITIESCash 5,900Supplies 550Land 20,000Accts.Payable 400C.Clark,Capital 25,000C.Clark,Drawing (2,000)FeesEarned 7,500WagesExpense (2,125)RentExpense (800)SuppliesExpense (800)UtilitiesExpense (450)Misc.Expense (275)OWNER’SEQUITYEffectsofTransactionsonOwner’sEquityOWNER’SEQUITYEffectsofTransactionsonOwner’sEquitydecreasedbyOWNER’SEQUITYEffectsofTransactionsonOwner’sEquityOwner’swithdrawalsExpensesdecreasedbyOWNER’SEQUITYEffectsofTransactionsonOwner’sEquityincreasedbyOWNER’SEQUITYEffectsofTransactionsonOwner’sEquityOwner’sinvestments

RevenuesincreasedbyOWNER’SEQUITYEffectsofTransactionsonOwner’sEquityOwner’swithdrawalsExpensesOwner’sinvestments

RevenuesdecreasedbyincreasedbyOWNER’SEQUITYEffectsofTransactionsonOwner’sEquityOwner’swithdrawalsExpensesOwner’sinvestments

RevenuesdecreasedbyincreasedbyNETINCOMEObjective8:FinancialStatementsNetSolutionsIncomeStatementFortheMonthEndedNovember30,2002Feesearned $7,500Operatingexpenses: Wagesexpense $2,125Rentexpense 800Suppliesexpense 800Utilitiesexpense 450Miscellaneousexpense 275Totaloperatingexpenses 4,450Netincome $3,050FinancialStatementsNetSolutionsIncomeStatementFortheMonthEndedNovember30,2002Feesearned $7,500Operatingexpenses: Wagesexpense $2,125Rentexpense 800Suppliesexpense 800Utilitiesexpense 450Miscellaneousexpense 275Totaloperatingexpenses 4,450Netincome $3,050FinancialStatementsNetSolutionsIncomeStatementFortheMonthEndedNovember30,2002Feesearned $7,500Operatingexpenses: Wagesexpense $2,125Rentexpense 800Suppliesexpense 800Utilitiesexpense 450Miscellaneousexpense 275Totaloperatingexpenses 4,450Netincome $3,050FinancialStatementsNetSolutionsIncomeStatementFortheMonthEndedNovember30,2002Feesearned $7,500Operatingexpenses: Wagesexpense $2,125Rentexpense 800Suppliesexpense 800Utilitiesexpense 450Miscellaneousexpense 275Totaloperatingexpenses 4,450Netincome $3,050NetSolutionsStatementofOwner’sEquityFortheMonthEndedNovember30,2002FinancialStatementsChrisClark,capital,November1,2002 $0InvestmentonNovember1,2002 $25,000 NetincomeforNovember 3,050 $28,050Lesswithdrawals 2,000Increaseinowner’sequity 26,050ChrisClark,capital,November30,2002 $26,050NetSolutionsStatementofOwner’sEquityFortheMonthEndedNovember30,2002FinancialStatementsChrisClark,capital,November1,2002 $0InvestmentonNovember1,2002 $25,000 NetincomeforNovember 3,050 $28,050Lesswithdrawals 2,000Increaseinowner’sequity 26,050ChrisClark,capital,November30,2002 $26,050NetSolutionsStatementofOwner’sEquityFortheMonthEndedNovember30,2002FinancialStatementsChrisClark,capital,November1,2002 $0InvestmentonNovember1,2002 $25,000 NetincomeforNovember 3,050 $28,050Lesswithdrawals 2,000Increaseinowner’sequity 26,050ChrisClark,capital,November30,2002 $26,050NetSolutionsStatementofOwner’sEquityFortheMonthEndedNovember30,2002FinancialStatementsChrisClark,capital,November1,2002 $0InvestmentonNovember1,2002 $25,000 NetincomeforNovember 3,050 $28,050Lesswithdrawals 2,000Increaseinowner’sequity 26,050ChrisClark,capital,November30,2002 $26,050NetSolutionsStatementofOwner’sEquityFortheMonthEndedNovember30,2002FinancialStatementsChrisClark,capital,November1,2002 $0InvestmentonNovember1,2002 $25,000 NetincomeforNovember 3,050 $28,050Lesswithdrawals 2,000Increaseinowner’sequity 26,050ChrisClark,capital,November30,2002 $26,050NetSolutionsBalanceSheetNovember30,2002

AssetsCash $5,900 Supplies 550Land 20,000Totalassets $26,450 LiabilitiesAccountspayable $400 Owner’sEquityChrisClark,capital 26,050Totalliabilitiesandowner’sequity $26,450FinancialStatementsNetSolutionsBalanceSheetNovember30,2002FinancialStatements

AssetsCash $5,900 Supplies 550Land 20,000Totalassets $26,450 LiabilitiesAccountspayable $400 Owner’sEquityChrisClark,capital 26,050Totalliabilitiesandowner’sequity $26,450NetSolutionsBalanceSheetNovember30,2002FinancialStatements

AssetsCash $5,900 Supplies 550Land 20,000Totalassets $26,450 LiabilitiesAccountspayable $400 Owner’sEquityChrisClark,capital 26,050Totalliabilitiesandowner’sequity $26,450NetSolutionsBalanceSheetNovember30,2002FinancialStatements

AssetsCash $5,900 Supplies 550Land 20,000Totalassets $26,450 LiabilitiesAccountspayable $400 Owner’sEquityChrisClark,capital 26,050Totalliabilitiesandowner’sequity $26,450NetSolutionsStatementofCashFlowsFortheMonthEndedNovember30,2002Cashflowsfromoperatingactivities:Cashreceivedfromcustomers $7,500Deductcashpaymentsforexpensesandpaymentstocreditors 4,600Netcashflowfromoperatingactivities $2,900Cashflowsfrominvestingactivities:Cashpaymentsforacquisitionofland (20,000)Cashflowsfromfinancingactivities:Cashreceivedasowner’sinvestment $25,000Deductcashwithdrawalbyowner 2,000Netcashflowfromfinancingactivities 23,000NetcashflowandNov.30,2002cashbalance $5,900

FinancialStatementsNetSolutionsStatementofCashFlowsFortheMonthEndedNovember30,2002

)FinancialStatementsCashflowsfromoperatingactivities:Cashreceivedfromcustomers $7,500Deduct