copyright © 2007 prentice-hall. all rights reserved 1 accounting and the business environment...
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Accounting and theAccounting and theBusiness EnvironmentBusiness Environment
Accounting and theAccounting and theBusiness EnvironmentBusiness Environment
Chapter 1
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Objective 1Objective 1Objective 1Objective 1
Use accounting vocabulary
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AccountingAccountingAccountingAccounting
• Measures
• Processes
• Communicates……
Financial information to decision makers
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Decision MakersDecision MakersDecision MakersDecision Makers
• Individuals
• Businesses
• Investors
• Creditors
• Taxing Authorities
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Financial vs. Managerial Financial vs. Managerial AccountingAccounting
Financial vs. Managerial Financial vs. Managerial AccountingAccounting
• Financial Accounting – Information for people outside of the company
• Managerial Accounting – Information for internal decision makers
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Governing OrganizationsGoverning OrganizationsGoverning OrganizationsGoverning Organizations
• FASB – Financial Accounting Standards Board
• SEC – Securities and Exchange Commission
• AICPA – American Institute of Certified Public Accountants
• IMA – Institute of Management Accountants
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EthicsEthicsEthicsEthics
• Audit– Examination of company’s financial situation– Performed by independent accountants
• Sarbanes-Oxley Act – criminal offense to falsify financial statements
• Public Companies Accounting Oversight Board – monitors work of accountants
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Standards of Professional ConductStandards of Professional ConductStandards of Professional ConductStandards of Professional Conduct
• AICPA – Code of Professional Conduct for Accountants
• IMA – Standards of Ethical Conduct
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Types of Business Types of Business OrganizationsOrganizations
Types of Business Types of Business OrganizationsOrganizations
• Proprietorships
• Partnerships
• Corporations
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Objective 2Objective 2Objective 2Objective 2
Apply accounting concepts and principles
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GAAP GAAP GAAP GAAP
• Generally Accepted Accounting Principles– Accounting guidelines that govern how
accountants measure, process, and communicate financial information
• Formulated by Financial Accounting Standards Board (FASB)
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GAAPGAAPGAAPGAAP
• Primary objective of financial accounting – provide information that is useful for making investment and lending decisions
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Entity ConceptEntity ConceptEntity ConceptEntity Concept
• Accounting Entity – organization that stands apart as a separate economic unit
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• Accounting information is based on the most reliable data available– Verifiable– Free from bias– Individuals would arrive at similar conclusions
using same data
Reliability (Objectivity) PrincipleReliability (Objectivity) PrincipleReliability (Objectivity) PrincipleReliability (Objectivity) Principle
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Cost PrincipleCost PrincipleCost PrincipleCost Principle
• Acquired assets and services should be recorded at their actual cost (historical cost)
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Going Concern ConceptGoing Concern ConceptGoing Concern ConceptGoing Concern Concept
• Assumes that the entity will remain in operation for the foreseeable future
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Stable-Monetary-Unit ConceptStable-Monetary-Unit ConceptStable-Monetary-Unit ConceptStable-Monetary-Unit Concept
• Assumes that the dollar’s purchasing power is stable
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Objective 3Objective 3Objective 3Objective 3
Use the accounting equation
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AssetsAssetsAssetsAssets
• Economic resources, expected to benefit the business in the future– Cash– Accounts receivable– Merchandise inventory– Furniture– Land
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Claims to the AssetsClaims to the AssetsClaims to the AssetsClaims to the Assets
• Liabilities – economic obligations payable to an individual or organization outside the business– Accounts payable– Notes payable– Salary payable
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Claims to the AssetsClaims to the AssetsClaims to the AssetsClaims to the Assets
• Owner’s Equity (capital) – claim of business owner to the assets of the business
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EconomicResources
Claims toEconomicResources
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
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Transactions that AffectTransactions that AffectOwner’s EquityOwner’s Equity
Transactions that AffectTransactions that AffectOwner’s EquityOwner’s Equity
OWNER’S EQUITY
INCREASES
OWNER’S EQUITYDECREASES
Owner Investments
Revenues Expenses
Owner Withdrawals
Owner’s Equity
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RevenuesRevenuesRevenuesRevenues
• Amounts earned by delivering goods or services to customers– Sales revenue– Service revenue– Interest revenue– Dividend revenue
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ExpensesExpenses
• Decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers– Salary expense– Rent expense– Utilities expense– Interest expense
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Exercise 1-18Exercise 1-18Exercise 1-18Exercise 1-18
Assets Liabilities Owner’s Equity
Pep Boys $ ? $60,000 $21,000
Eddie Bauer 72,000 ? 40,000
Benbrook Exxon
100,000 79,000 ?
$81,000
32,000
21,000
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Objective 4Objective 4Objective 4Objective 4
Analyze business transactions
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TransactionTransactionTransactionTransaction
• An event that affects the financial position of a particular entity and can be recorded reliably
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Exercise 1-17Exercise 1-17Exercise 1-17Exercise 1-17
a. Increased assets (cash)
b.No effect on total assets. Increase in land offset the decrease in cash
c. Decreased assets (cash)
d. Increased assets (equipment)
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Exercise 1-17Exercise 1-17Exercise 1-17Exercise 1-17
e. Increased assets (accounts receivable)
f. Decreased assets (cash)
g. No effect on total assets. Increase in cash offset the decrease in accounts receivable
h. Increased assets (cash)
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Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
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Does the account increase or decrease?
(1) Cash (asset)
(2) Owner’s Equity (equity)
July 6: Lange invested $45,000 in the business by opening a bank account in the name of M. Lange, M.D.
Analyze this:Analyze this:Analyze this:Analyze this:
What accounts are involved?
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
45,000 Investment
Assets = $45,000 Liabilities & Owner’s Equity = $45,000
45,0006
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(1) Cash (asset)
(2) Land (asset)
Analyze this:Analyze this:Analyze this:Analyze this:
July 9: Paid $35,000 cash for land
Does the account increase or decrease?What accounts are involved?
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
45,000 Investment
35,000
Assets = $45,000 Liabilities & Owner’s Equity = $45,000
45,0006
-35,0009
45,00035,00010,000Bal
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(1) Medical Supplies (asset)
(2) Accounts Payable (liability)
Analyze this:Analyze this:Analyze this:Analyze this:
July 12: Purchased medical supplies for $2,000 on account
Does the account increase or decrease?What accounts are involved?
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
2,000
Assets = $47,000 Liabilities & Owner’s Equity = $47,000
2,00012
45,00035,00010,000Bal
45,00035,00010,000Bal 2,0002,000
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Does the account increase or decrease?
(1) Cash (asset)
(2) Revenues (equity)
Analyze This:Analyze This:Analyze This:Analyze This:
July 15-31: During the rest of the month, Lange treated patients and earned service revenue of $7,000, receiving cash
What accounts are involved?
When the owner
completes work, her
interest in the assets
increases
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
Assets = $54,000 Liabilities & Owner’s Equity = $54,000
7,00015-31 7,000 Revenue
52,00035,00017,000Bal 2,0002,000
45,00035,00010,000Bal 2,0002,000
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Does the account increase or decrease?
(1) Cash (asset)
(2) Expense (equity)
Analyze This:Analyze This:Analyze This:Analyze This:
July 15-31: Paid cash expenses
What accounts are involved?
When an expense is incurred, owner’s equity decreases
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
Assets = $51,000 Liabilities & Owner’s Equity = $51,000
52,00035,00017,000Bal 2,0002,000
-1,70015-31 -1,700 Salaries Exp
-1,000 Rent Exp-1,000
- 300 Utilities Exp- 300
49,00035,00014,000Bal 2,0002,000
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Does the account increase or decrease?
(1) Cash (asset)
(2) Medical Supplies (asset)
Analyze This:Analyze This:Analyze This:Analyze This:
July 28: Sold supplies to another physician for the cost of those supplies
What accounts are involved?
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
Assets = $51,000 Liabilities & Owner’s Equity = $51,000
500 28 -500
49,00035,00014,500Bal 2,0001,500
49,00035,00014,000Bal 2,0002,000
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Does the account increase or decrease?
(1) Cash (asset)
(2) Accounts Payable (liability)
Analyze This:Analyze This:Analyze This:Analyze This:
July 31: Paid $1,500 on account
What accounts are involved?
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Date Assets Liabilities Owner’s Equity
July Cash Medical Supplies
Land Accounts Payable
M.Lange, Capital
Type of Transaction
Exercise 1-22Exercise 1-22Exercise 1-22Exercise 1-22
Assets = $49,500 Liabilities & Owner’s Equity = $49,500
-1,500 31 -1,500
49,00035,00014,500Bal 2,0001,500
49,00035,00013,000Bal 5001,500
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Accounting for Business Accounting for Business TransactionsTransactions
Accounting for Business Accounting for Business TransactionsTransactions
• Note: 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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Objective 5Objective 5Objective 5Objective 5
Prepare financial statements
Evaluate business performance
Objective 6Objective 6Objective 6Objective 6
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
• Income statement
• Statement of owner’s equity
• Balance sheet
• Statement of cash flows
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Income StatementIncome StatementIncome StatementIncome Statement
• Summary of an entity’s revenues, expenses, and net income or net loss for a specific period
Revenues - Expenses
• Net Income: Revenues > Expenses
• Net Loss: Expenses > Revenues
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Statement of Owner’s EquityStatement of Owner’s EquityStatement of Owner’s EquityStatement of Owner’s Equity
• Summary of changes in an entity’s owner’s equity during a specific period
Beginning owner’s equity+ Owner’s investments+ Net income- Net loss- Owner’s withdrawalsEnding owner’s equity
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Balance SheetBalance SheetBalance SheetBalance Sheet
• Reports the entity’s assets, liabilities, and owner’s equity as of a specific date
Assets = Liabilities + Owner’s Equity
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Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
• Reports cash receipts and cash payments during a period (covered in Chapter 17)
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
• Using the transactions from Exercise 1-22, prepare the income statement, statement of owner’s equity, and balance sheet
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Maria Lange, M.D.Maria Lange, M.D.Income StatementIncome Statement
For the Month Ended July 31, 2006For the Month Ended July 31, 2006
Maria Lange, M.D.Maria Lange, M.D.Income StatementIncome Statement
For the Month Ended July 31, 2006For the Month Ended July 31, 2006
Revenue:
Fees earned$7,000
Expenses:
Salary expense $1,700
Rent expense 1,000
Utilities expense 300
Total Expenses3,000
Net income$4,000
Notice the proper
heading
Anytime you
subtotal, create a
new column to the left
Double underline for your
final answer
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Maria Lange, capital, July 1, 2006 $ 0
Add: Investment by owner 45,000
Net income for the month 4,000
$49,000
Less: Withdrawals by owner 0
Maria Lange, capital, July 31, 2006 $49,000
Maria Lange, M.D.Maria Lange, M.D.Statement of Owner’s EquityStatement of Owner’s Equity
For the Month Ended July 31, 2006For the Month Ended July 31, 2006
Maria Lange, M.D.Maria Lange, M.D.Statement of Owner’s EquityStatement of Owner’s Equity
For the Month Ended July 31, 2006For the Month Ended July 31, 2006Dates are important to the reader of the financial
reports
From incomestatement
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Details, DetailsDetails, DetailsDetails, DetailsDetails, Details
• Note the headings for both of these statements– Name of company– Name of financial statement– For the period ended …….
• Both of these statements report activity over a period of time
• Final sums are double-underlined
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Details, DetailsDetails, DetailsDetails, DetailsDetails, Details
• Negative amounts are presented in parentheses
• Net income is computed first because you need that number to complete the ending balance in owner’s equity
• When preparing a financial statement, clearly label each line in the statement
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Details, detailsDetails, detailsDetails, detailsDetails, details
• If you are using columnar paper, always start your number columns in the far right-hand column
• Numbers that are added or subtracted from each other should be in the same column
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Maria Lange, M.D.Maria Lange, M.D.Balance SheetBalance SheetJuly 31, 2006July 31, 2006
Maria Lange, M.D.Maria Lange, M.D.Balance SheetBalance SheetJuly 31, 2006July 31, 2006
Assets
Cash $13,000
Medical supplies 1,500
Land 35,000
Total assets $ 49,500
Liabilities
Accounts payable $500
Owner’s equity,
M. Lange, capital 49,000
Total liabilities and owner’s equity $ 49,500
From statement ofowner’s equity
Notice the proper
heading
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Details, detailsDetails, detailsDetails, detailsDetails, details
• Note the heading for the balance sheet is different from the other statements
Name of company
Name of financial statement
Date
• This statement reports what the company owns and who has claims to the assets at a specific point in time
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Cash $2,000
Accounts receivable 6,000
Supplies 500
Equipment 15,500
Total Assets $24,000
Allen Samuel Road ServiceBalance Sheet
November 30, 2009
Liabilities
Accounts payable $3,500
Note payable 5,000
Total liabilities $8,500
Owner’s Equity
A. Samuel, capital 15,500
Total liabilities and owner’s equity $24,000
Assets
Exercise 1-24Exercise 1-24Exercise 1-24Exercise 1-24
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Exercise 1-24Exercise 1-24Exercise 1-24Exercise 1-24
What does a balance sheet report – financial position or operating results?
• Financial position
Which financial statement reports the other information?
• The income statement summarizes revenues and expenses
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Exercise 1-26Exercise 1-26Exercise 1-26Exercise 1-26Ciliotta Design Studio
Income StatementYear Ended December 31, 2006
Service revenue $158,100Expenses:
Salary expense $60,000
Rent expense 24,000
Utilities expense 6,800
Supplies expense 4,000
Property tax expense 1,200
Total expenses 96,000
Net income $62,100
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Exercise 1-26Exercise 1-26Exercise 1-26Exercise 1-26
2. Owner’s withdrawals:
Ciliottas, capital, beginning of year $ 0
Add: Net income 62,100
Investment by owner 15,000
Subtotal $77,100
Less: Owner withdrawal ?
Ciliotta, capital, end of year $27,100 50,000
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End of Chapter 1End of Chapter 1End of Chapter 1End of Chapter 1