1-1 copyright houghton mifflin company. all rights reserved. financial accounting needles, powers...

1-1-11Copyright Houghton Mifflin Company. All rights reserved.

Financial AccountingFinancial AccountingNeedles, Powers & CrossonNeedles, Powers & Crosson

Financial & Managerial Financial & Managerial

AccountingAccounting

2002e2002e

Presented by:Presented by:

Gayle M. RichardsonGayle M. Richardson

CPA, ProfessorCPA, Professor


Chapter 1Chapter 1Uses of Accounting Information andUses of Accounting Information and

the Financial Statementsthe Financial Statements


LEARNING OBJECTIVESLEARNING OBJECTIVES

1. Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions.

2. Identify the many users of accounting information in society.

3. Explain the importance of business transactions, money measure, and separate entity to accounting measurement.

4. Describe the corporate form of business organization.


5. Define financial position, state the accounting equation, and show how they are affected by simple transactions.

6. Identify the four basic financial statements.

7. State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP.

8. Define ethics and describe the ethical responsibilities of accountants.

LEARNING OBJECTIVES LEARNING OBJECTIVES (continued)(continued)


Accounting as an Information SystemAccounting as an Information System

OBJECTIVE 1 Define accounting, identify business goals

and activities, and describe the role of accounting in making informed decisions.


Today’s accountant focuses on the ultimate needs of decision makers who use accounting information, whether those decision makers are inside or outside the business.


Today’s accountant focuses on the ultimate needs of decision makers who use accounting information, whether those decision makers are inside or outside the business.

Accounting “is not an end in itself,” but is an information system that measures, processes, and communicates financial information about an identifiable economic entity.


Accounting provides a vital service by supplying the information decision makers need to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities.


Accounting is a link between business activities and decision makers. Accounting measures business activities by

recording data about them for future use. The data are stored until needed and then

processed to become useful information.


The information is communicated, through reports, to decision makers.


The information is communicated, through reports, to decision makers.

Data about business activities are the input to the accounting system and useful information for decision makers is the output.


1-1

Data Information

ACCOUNTING

BUSINESSACTIVITIES

DECISIONMAKERS

MEASUREMENT

Accomplishedby recording ofdata

PROCESSING

Accomplishedby storage andpreparation ofdata

Communication

Accomplishedby reporting



Business Goals, Activities, and Business Goals, Activities, and Performance MeasuresPerformance Measures

A business is an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.

Businesses, though diverse, have similar goals and engage in similar activities.


Business GoalsBusiness Goals

1. Profitability. A business must take in enough money to pay all the costs of doing business, with enough left over as profit for the owners to want to stay in business.

2. Liquidity. A business must have enough funds available to pay debts when they are due.


Business Goals and ActivitiesBusiness Goals and Activities


1. Financing Activities. Obtaining capital from owners and creditors. Repaying creditors and a return to owners.

2. Investing Activities. Spending the capital it receives in ways that are

productive and will help the business achieve its objectives.

Buying and selling assets to be used in the business.

Business ActivitiesBusiness Activities


Business Activities Business Activities (continued)(continued)

3. Operating Activities. Selling of goods and services to customers. Employing managers and workers, buying and

producing goods and services, and paying taxes.


Indicate whether or not managers are achieving the business goals and if they are managing business activities well.

Performance measures include: Earned income. Cash flow. Ratio of expenses to revenues. Ratio of money owed to total resources controlled.

Managers should understand these measures.

Performance MeasuresPerformance Measures


Performance measures must align with business goals:

Performance MeasuresPerformance Measures

Financing performance level.

Ratio of money owed to total resources controlled.

Operating performance level.

Ratio of expenses to revenues.

Liquidity. Cash flow.

Profitability.Earned income.

GoalPerformance Measure

Managers should understand and be motivated by these measures.


Financial and Management Financial and Management AccountingAccounting

Accounting’s role of assisting decision makers by measuring, processing, and communicating information is usually divided into two categories:1. Management accounting.2. Financial accounting.

The two may be distinguished by the principal users of their information.


Is oriented toward the needs of internal decision makers.

Provides managers and employees with information regarding how they have done in the past and what they can expect in the future.

Management AccountingManagement Accounting


Is oriented toward the needs of external decision makers.

Provides information in the form of financial statements so that external decision makers can evaluate how well the business has achieved its goals.

Financial statements report directly on the goals of profitability and liquidity. Financial statements are used extensively both inside and

outside a business to evaluate the business’s success.

Financial AccountingFinancial Accounting


Processing Accounting InformationProcessing Accounting Information

Bookkeeping is the mechanical and repetitive process of recording financial transactions and keeping financial records.

Bookkeeping is a small part of accounting. Accounting includes the design of an information

system that meets user’s needs. Accounting goals are the analysis, interpretation,

and use of information.

Accounting versus bookkeeping


Computers are used extensively in accounting as a tool for the accountant.


Computers are used extensively in accounting as a tool for the accountant.

A business’s many information needs are organized into a Management Information System (MIS). An MIS consists of various interconnected

subsystems. The Accounting Information System (AIS) is the

most important subsystem.


Q. What is the difference between profitability and liquidity?

A. Profitability means earning enough income to attract

and hold investment capital. Liquidity means being able to pay debts when they fall

due.

Discussion Discussion


Decision Makers: The Users of Decision Makers: The Users of Accounting InformationAccounting Information

OBJECTIVE 2Identify the many users of accounting information in society.


The Users of Accounting Information The Users of Accounting Information

The Users of Accounting InformationThe Users of Accounting Information


The people who use accounting information to make decisions fall into three categories.1. Management.

2. Outside users with a direct financial interest.

3. People, organizations, and agencies with an indirect financial interest.

These categories apply both to profit-oriented ventures as well as government and not-for-profit organizations.

Decision MakersDecision Makers


Requires financial information to carry out its basic functions.

1. Financing the business.

2. Investing the resources of the business.

3. Producing goods and services.

4. Marketing goods and services.

5. Managing employees.

6. Providing information to decision makers.

ManagementManagement


Investors Creditors

Outside Users withOutside Users witha Direct Financial Interesta Direct Financial Interest


Tax Authorities. Regulatory Agencies. Labor Unions. Customers &

Consumer Groups. Investment Advisors The Financial Media Economic Planners.

People, Organizations, and Agencies with People, Organizations, and Agencies with an Indirect Financial Interestan Indirect Financial Interest


Q. Which decision makers use accounting information?

A. Three groups of decision makers use accounting information. 1. Those who manage a business. 2. Those outside a business enterprise who have a

direct financial interest in the business. 3. Those people, organizations, and agencies that

have an indirect financial interest in the business.



Accounting MeasurementAccounting Measurement

OBJECTIVE 3Explain the importance of businesstransactions, money measure, andseparate entity to accountingmeasurement.


Four Basic QuestionsFour Basic Questions

1.What is measured?

2.When should the measurement be made?

3.What value should be placed on what is measured?

4.How should what is measured be classified?


Business transactions as the object of measurement. Business transactions are economic events that effect

the financial position of a business entity. Transactions are the raw material of accounting reports. Transactions must relate directly to a business entity.

What Is Measured?What Is Measured?


Money Measure. Money is the only factor common to all business

transactions. The monetary unit a business uses depends on the

country in which the business resides. Exchange rates translate one currency to another.


Money Measure. Money is the only factor common to all business

transactions. The monetary unit a business uses depends on the country

in which the business resides. Exchange rates translate one currency to another.

The Concept of Separate Entity. A business is a separate entity, distinct from its creditors

and customers and from its owner or owners.


Q. Tell whether each of the following words or phrases relates most closely to a: (a) business transaction, (b) separate entity, or (c) money measure.

1. Partnership2. U.S. dollar3. Payment of an expense4. Corporation5. Sale of an asset



1. Partnership: (b)

2. U.S. dollar: (c)

3. Payment of an expense: (a)

4. Corporation: (b)

5. Sale of an asset: (a)

KEY

(a) business transaction (b) separate entity (c) money measure

A.A.


OBJECTIVE 4Describe the corporate form of business

organization.


Types of Business OrganizationTypes of Business Organization

Sole Proprietorship. Partnership. Corporation.


Sole ProprietorshipsSole Proprietorships

• Owned by one person.• Records should be kept separate from

owner’s personal interests.• Legally same economic unit as owner.• Unlimited liability.• Ends when owner wants it to, or owner

dies.


PartnershipsPartnerships

• More than one owner.• Unincorporated association, not

legally separate from owners.• Unlimited liability.• Mutual agency, any partner can bind

all partners to a contract .• Ends when ownership changes, e.g

partner leaves or dies.


CorporationsCorporations

• One or more owners (stockholders.)• Legally separate entity from owners.• Owners can be separate from managers.• Limited liability.• Unlimited life.


Number and Receipts of U.S. Proprietorships, Partnerships, Number and Receipts of U.S. Proprietorships, Partnerships, and Corporations, 1997and Corporations, 1997


The Corporate Form of BusinessThe Corporate Form of Business


Organization of a CorporationOrganization of a Corporation• To form a corporation, articles of incorporation

must be filed with and approved by the state.

Stockholders are the owners of the corporation.

The Board of Directors is elected by the stockholders

to set policies and choose officers.

Management consists of operating officers who carry

out the policies and run day-to-day operations.


Q. How do sole proprietorships, partnerships, and corporations differ?

A. A sole proprietorship is a business owned by one individual. A partnership is similar in most respects to a proprietorship except

that more than one owner is involved. A corporation is an economic unit that is legally separate from its

owners.



Financial Position and the Financial Position and the Accounting EquationAccounting Equation

OBJECTIVE 5Define financial position,

state the accounting equation, and

show how they are affected by

simple transactions.


Financial PositionFinancial Position

Assets = Liabilities + Owner’s Equity

A = L + OETHE ACCOUNTING EQUATION!!


Assets are economic resources owned by a business that are expected to benefit future operations. Monetary items. Nonmonetary physical things. Nonphysical items

AssetsAssets


LiabilitiesLiabilities Liabilities are the present obligations of a

business to pay cash, transfer assets, or provide services to other entities in the future.

Liabilities are debts recognized by law. Creditors must be paid before stockholders.


Owner’s equity represents the claims by the owners of a business to the assets of the business.

Owner’s equity is the residual equity that remains after deducting liabilities from assets.

OE = Assets - Liabilities. Assets = Liabilities + OE

Owner’s EquityOwner’s Equity


Contributed CapitalContributed Capital

• The amount invested in the business by stockholders

• Typically, it comprises par value stock and additional paid-in-capital


Retained Earnings• Equity generated from the income-producing

activities and kept for use in the business.

Revenues and Expenses• Increases and decreases in equity that result

from operating a business

Dividends• Distributions to stockholders of assets

(usually cash) generated by past earnings.


Three Types of Transactions That Three Types of Transactions That Affect Retained EarningsAffect Retained Earnings


Net Income / LossNet Income / Loss

Revenues > Expenses

Revenues < Expenses

Net Income

Net Loss


Some Illustrative TransactionsSome Illustrative Transactions


The owner invests $50,000The owner invests $50,000

ASSETS OE Cash Capital

Assets = $50,000; L+OE = $50,000

Beg. Bal.T1.End. Bal.

$ 0 50,000$50,000

$ 0 50,000$50,000


T2 - Purchases land and Building T2 - Purchases land and Building for $35,000for $35,000

Assets = $50,000; L+OE = $50,000

ASSETS Cash Land Bldg.

Beg. Bal. $50,000 $ 0 $ 0T2. -35,000 +10,000 +25,000End. Bal. $15,000 $10,000 $25,000


T3. Purchase of Supplies on account T3. Purchase of Supplies on account

Assets = $50,500; L+OE= $50,500

ASSETS LIABILITIESSupplies A/P

Beg. Bal. $ 0 $ 0 T3. +500 +500End. Bal. $500 $500


T4. Payment of a Liability T4. Payment of a Liability with Cashwith Cash

Assets = $50,300; L+OE = $50,300

ASSETS LIABILITIES Cash A/P

$15,000- 200$14,800

Beg. Bal.T4.End. Bal.

$500-200$300


T5. Revenues Earned - Commission That T5. Revenues Earned - Commission That Was Paid in CashWas Paid in Cash

Assets = $51,800; L+OE = $51,800

ASSETS SE Cash R/EBeg. Bal $14,800 $ 0T5. + 1,500 +1,500End. Bal. $16,300 $1,500


T6. Revenues Earned -Commission with T6. Revenues Earned -Commission with Deferred ReceiptDeferred Receipt

Assets = $53,800; L+SE = $53,800

ASSETS OE A/R Beg. Bal $ 0 $1,500T6. +2,000 +2,000End. Bal. $2,000 $3,500


T7. Collection of Accounts T7. Collection of Accounts ReceivableReceivable

Assets = $53,800; L+SE = $53,800

ASSETS Cash A/R

Beg. Bal. $16,300 $2,000T7. + 1,000 - 1,000End. Bal. $17,300 $1,000


T8. Paid Equipment Rental Expense T8. Paid Equipment Rental Expense T9. Paid Wages Expense with CashT9. Paid Wages Expense with Cash

Assets = $52,400; L+SE = $52,400

ASSETS OE CashBeg. Bal $ 17,300 $3,500T8. - 1,000 -1,000 T9. - 400 - 400End. Bal. $15,900 $2,100


T10. Paid Utility Expense Incurring a T10. Paid Utility Expense Incurring a Current LiabilityCurrent Liability

Assets = $52,400; L+OE = $52,400

A/P O/EBeg. Bal. $300 $2,100T10. +300 - 300End. Bal. $600 $1,800


T11. Paid Dividends with CashT11. Paid Dividends with Cash

Assets = $51,800; L+OE = $51,800

ASSETS OE CashBeg. Bal $15,900 $1,800T11. - 600 - 600End. Bal. $15,300 $1,200


Q. Define financial position.

A. Financial position refers to the economic resources that belong to a company and the claims against those resources at a point in time.



Communication Through Financial Communication Through Financial StatementsStatements

OBJECTIVE 6Identify the four financial statements.


The Importance ofThe Importance ofFinancial StatementsFinancial Statements

The Importance ofThe Importance ofFinancial StatementsFinancial Statements

Financial statements are the primary means of communicating important accounting information to users.

Financial statements represent models of the business enterprise because they show the business in financial terms.

Financial statements are not perfect pictures of the real thing.


The Income StatementThe Income StatementThe Income StatementThe Income Statement Summarizes revenues earned expenses

incurred over a period of time. Is considered by many to be the most

important financial report because it shows whether or not a business achieved its profitability goal of earning an acceptable income.


[Entity][Entity] Shannon Realty Shannon Realty[Title][Title] Income Statement Income Statement

[Period][Period] For the Month Ended December 31, 19xx For the Month Ended December 31, 19xx

Trace to Statement ofOwner’s Equity

Revenues Commissions Earned $3,500

Expenses Equipment Rental $1,000 Wages 400 Utilities 300 Total Expenses $1,700Net Income $1,800

Compare with page 25 in text - this is for a proprietorship


The Statement of Owner’s EquityThe Statement of Owner’s EquityThe Statement of Owner’s EquityThe Statement of Owner’s Equity

Shows the changes in owner’s equity over a period of time.


Shannon Realty Shannon Realty Statement of Owner’s EquityStatement of Owner’s Equity

For the Month Ended December 31, 19xxFor the Month Ended December 31, 19xxOwner’s Equity, Beginning $ 0Net Income for the Month 1,800Subtotal $ 1,800Less Withdrawals 600Owner’s Equity, Ending $ 1,200

Trace to Owners’ EquitySection of Balance Sheet


The Balance SheetThe Balance SheetThe Balance SheetThe Balance Sheet Shows financial position at a point in time. Is often called the statement of financial position. Presents a view of the business as the holder of

resources, or assets, that are equal to the claims against those assets.


Shannon RealtyShannon RealtyBalance SheetBalance Sheet

As of December 31, 19xxAs of December 31, 19xx

ASSETS

Cash $15,300

A/R 1,000

Supplies 500

Land 10,000

Building 25,000

Total Assets $51,800


Shannon RealtyShannon RealtyBalance SheetBalance Sheet

As of December 31, 19xxAs of December 31, 19xx

LIABILITIES

A/P $ 600

OWNER’S EQUITY

Capital, Shannon $51,200

Total OE 51,200

Total Liabilities and SE $51,800


The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows Focuses on a company’s liquidity goal. Shows cash produced by operating a business as

well as important financing and investing transactions that take place during an accounting period.

Is derived from the income statement and balance sheet.

Is directly related to the other three statements.


Shannon RealtyShannon RealtyStatement of Cash FlowsStatement of Cash Flows

For the Month Ended December 31, 19xxFor the Month Ended December 31, 19xx

Cash Flows from Operating Activities

Net Income $1,800Noncash Expenses and Revenues Included in Income Increase in A/R $(1,000) Increase in Supplies (500) Increase in A/P 600 (900)

Net Cash Flows from Operating Activities $900


Shannon RealtyShannon Realty Statement of Cash Flows Statement of Cash Flows


Purchase of Land ($10,000) Purchase of Building (25,000) Net Cash Flows from Investing Activities (35,000)

Cash Flows from Investing Activities


Shannon RealtyShannon RealtyStatement of Cash FlowsStatement of Cash Flows


Investments by Owner $50,000

Withdrawals by Owner (600)

Net Cash Flows from

Financing Activities 49,400

Net Increase (Decrease) in Cash $15,300 Cash at Beginning of Month 0 Cash at End of Month $15,300

Cash Flows from Financing Activities

Trace to Balance Sheet


Contributed CapitalContributed Capital

• The amount invested in the business by stockholders

• Typically, it comprises par value stock and additional paid-in-capital


Retained Earnings• Equity generated from the income-producing

activities and kept for use in the business.

Revenues and Expenses• Increases and decreases in equity that result

from operating a business

Dividends• Distributions to stockholders of assets

(usually cash) generated by past earnings.


Three Types of Transactions That Three Types of Transactions That Affect Retained EarningsAffect Retained Earnings


Net Income / LossNet Income / Loss

Revenues > Expenses

Revenues < Expenses

Net Income

Net Loss


If Shannon Realty had been a If Shannon Realty had been a corporationcorporation

the following slides show the the following slides show the financial statements. See if you can financial statements. See if you can

notice the differencesnotice the differences


Shannon Realty, Shannon Realty, Inc.Inc. Income StatementIncome Statement


Revenues Commissions Earned $3,500

Expenses Equipment Rental Expense $1,000 Wages Expense 400 Utilities Expense 300 Total Expenses $1,700Net Income $1,800

There is no difference. However, if there hadbeen income taxes it would have been shownon this statement. A corporation pays taxesa proprietorship does not, the income is includedwith all other income of the proprietor.

The name includes Inc.which is an abbreviation

for Incorporated


The Statement of Retained EarningsThe Statement of Retained EarningsThe Statement of Retained EarningsThe Statement of Retained Earnings

• Shows the change in the owners’ capital over a period of time.

A proprietorship does not have this statement. The Statement of Owner’s Equity serves the same purpose.


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Retained EarningsStatement of Retained Earnings


Retained Earnings, 12/1/xx

$ 0

Net Income for the Month 1,800

Subtotal $ 1,800 Less Dividends 600 Retained Earnings, 12/31/xx $ 1,200


Shannon Realty, Inc.Shannon Realty, Inc.Balance SheetBalance Sheet

December 31, 20xxDecember 31, 20xx

AssetsCash $15,300

Accounts Receivable 1,000

Supplies 500

Land 10,000

Building 25,000

Total Assets $51,800

LiabilitiesAccounts Payable $600

Stockholders’ EquityCommon Stock $50,000

Retained Earnings 1,200

Total Stockholders’ 51,200

Equity

Total Liabilities and $51,800

Stockholders’ Equity

The Stockholders are the owners The Common Stock account represents what they paid the corporation for their stock --- investment by owner.

Retained earnings represents Net Income (Loss) since incorporating less all dividends since incorporating.


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Cash FlowsStatement of Cash Flows


Cash Flows from Operating Activities

Net Income $1,800Noncash Expenses and Revenues Included in Income Increase in Accounts Receivable $(1,000) Increase in Supplies (500) Increase in Accounts Payable 600 (900)

Net Cash Flows fromOperating Activities $900The Cash Flow Statement

is the same!


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Cash FlowsStatement of Cash Flows

For the Month Ended December 31, 20xxFor the Month Ended December 31, 20xx(continued…)(continued…)

Purchase of Land ($10,000) Purchase of Building (25,000) Net Cash Flows from Investing Activities (35,000)

Cash Flows from Investing Activities


Shannon Realty, Inc. Shannon Realty, Inc. Statement of Cash FlowsStatement of Cash Flows

For the Month Ended December 31, 20xxFor the Month Ended December 31, 20xx(continued…)(continued…)

Cash Flows from Financing Activities Investments by Stockholders $50,000

Dividends (600) Net Cash Flows from

Financing Activities 49,400

Net Increase (Decrease) in Cash $15,300 Cash at Beginning of Month 0

Cash at End of Month $15,300


Q. Why is the balance sheet sometimes called the statement of financial position?

A. Financial position consists of the economic resources that belong to a business and the claims against those resources as of a certain date. This is the information shown on the balance sheet.



Generally Accepted Generally Accepted Accounting Principles Accounting Principles

OBJECTIVE 7State the relationship of generallyaccepted accounting principles(GAAP) to financial statements andthe independent CPA’s report, andidentify the organizations thatinfluence GAAP.


Focus on understandability of financial statements.

Encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Generally Accepted Generally Accepted Accounting Principles (GAAP)Accounting Principles (GAAP)


Financial statements are prepared by management and may be biased.

Financial statements are audited by independent CPAs.

An audit ascertains that the financial statements have been prepared in accordance with GAAP.

Financial Statements, GAAP, andFinancial Statements, GAAP, andthe Independent CPA’s Reportthe Independent CPA’s Report


FASB. AICPA. GASB. IASC. IRS.

Organizations that InfluenceOrganizations that InfluenceCurrent PracticeCurrent Practice


Q. What are GAAP?

A. GAAP are generally accepted accounting principles; they are the “conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.”



Q. Why are GAAP important to readers of financial statements?

A. GAAP ensure that the financial statements will be understandable to their users.



Professional Ethics and the Professional Ethics and the Accounting ProfessionAccounting Profession

OBJECTIVE 8Define ethics and describe the ethical

responsibilities of accountants.


What Are Professional Ethics?What Are Professional Ethics? A code of conduct that applies to the practice

of a profession. Code of conduct adopted by the AICPA and

each state. Responsibility to the public. Integrity. Objectivity. Independence. Due care.


The Institute of Management The Institute of Management Accountants (IMA) Code of Professional Accountants (IMA) Code of Professional

ConductConduct Competency. Confidentiality. Integrity. Avoidance of conflicts of interest. Communication of information

objectively and without bias.


Q. Discuss the importance of professional ethics in the accounting profession.

A. Professional ethics forms a code of conduct that applies to the practice of a profession. As members of a profession, accountants have a responsibility, not only to their employers and clients but also to society as a whole, to uphold the highest ethical standards.



1. Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions.

2. Identify the many users of accounting information in society.

3. Explain the importance of business transactions, money measure, and separate entity to accounting measurement.

OK, LET’S REVIEW . . .


4. Identify the three basic forms of business organization.

5. Define financial position, state the accounting equation, and show how they are affected by simple transactions.

6. Identify the four basic financial statements.

CONTINUING OUR REVIEW . . .


7. State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP.

8. Define ethics and describe the ethical responsibilities of accountants.

AND FINALLY . . .

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