copyright © 2011 south-western/cengage learning1 powerpoint author: catherine lumbattis 7/e 77/e...
DESCRIPTION
Forms of Organization Sole Proprietorship Partnership Corporation one owner two or more owners entity organized under laws of a particular state LO2TRANSCRIPT
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COPYRIGHT © 2011 South-Western/Cengage Learning 1
PowerPoint Author: Catherine Lumbattis
7/e77/e/7/e
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What Is Business?
Activities
to provide members of an economic system
with goods and services
LO1
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Forms of OrganizationSole Proprietorship
Partnership
Corporation
one owner
two or more owners
entity organized under laws of a particular state
LO2
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Nonbusiness Entities
Government Entities Private Organizations
Federal, State, and Local Governments Hospitals, Universities,
Cooperatives
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The Nature of Business ActivityFinancingActivities
Investing Activities
OperatingActivities
Examples:
•borrowing •sale of stock
• purchase of assets • sale of products/services
• costs incurred to operate business LO3
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What Is Accounting?Identifying
Measuring
Communicating
EconomicInformation
to various
users
LO4
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Internal and ExternalUsers of Accounting Information
Internal Users –
Management
CreditorsCurrentand
PotentialOwners
GovernmentAgencies
Suppliers
TradeAssociations
FinancialAnalysts
Bankers
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Decisions Made with Financial Information
Invest??
Borrow $$??
Sell stocks or bonds??
Build new plant??
Add new product line??
Start new business??
Loan $$??Extend credit $$??
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The Accounting Equation Assets = Liabilities + Owners’
Equity (or Stockholders’ Equity)
Creditors’claims
to assets
Owners’claims
to assets
Economicresources = +
Examples:CashAccounts receivableLand
Accounts payableNotes payable
Capital stockRetained earnings
LO5
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Balance Sheet(snapshot of financial position)
AssetsLiabilities
Owners’ Equity (or Stockholders’ Equity)
=+
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Current assets:Cash $ 200Accounts receivable 600Land 4,000
Lodge, lifts and equipment 2,500
Total assets $7,300
Top of the World Balance SheetJune 30, 2010
A A = L + SE
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Top of the WorldBalance SheetJune 30, 2010
Liabilities:Accounts payable $ 700Salaries and wages payable 400 Notes payable 3,000
Total liabilities $4,100
Liabilities and Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $7,300
= L
A = L + SE
Stockholders’ equity:Capital stock $2,000Retained earnings 1,200
Total stockholders’ equity $3,200
+ SE
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Income Statement(for a period of time)
Revenues $$Less: Expenses ($$)Net income $$
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Top of the WorldIncome Statement
For the Year Ended June 30, 2010
Revenues:Lift tickets $5,800
Equipment rentals 2,200 Total revenues $8,000 Expenses:
Salaries and wages $2,000 Depreciation 100 Water, gas, and electricity 1,500 Insurance 1,100
Interest 300 Income taxes 1,000 Total expenses 6,000 Net income $2,000
Revenues
Revenues – Expenses = Net Income
Expenses
Net Income
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Statement of Retained Earnings(for a period of time)
Beginning retained earnings $$$Add: Net income for the period $$$Deduct: Dividends for the period ($$$)Ending retained earnings $$$
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Top of the WorldStatement of Retained Earnings For the Year Ended June 30, 2010Retained earnings, beginning of the year $ 0
Add: Net income for the year 2,000
Deduct: Dividends for the year (800)
Retained earnings, end of the year $ 1,200
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Top of the WorldStatement of Cash Flows
For the Year ended June 30, 2010 Cash flows from operating activities:Cash collected from customers $ 7,400Cash payments for: Salaries and wages $ 1,000 Water, gas, and electricity 1,500 Insurance 400 Interest 300 Income taxes 1,000 Total cash payments 4,800Net cash provided by operating activities $ 2,600
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Top of the WorldStatement of Cash Flows
For the Year ended June 30, 2010Cash flows from investing activities: Purchase of land $(4,000) Purchase of lodge, lift and equipment (2,600)Net cash flows from investing activities $(6,000)Cash flows from financing activities: Proceeds from issuance of long term note $ 3,000 Proceeds from issuance of capital stock 2,000 Dividends declared and paid (800)Net cash flows from financing activities 4,200Net increase in cash $ 200Cash at beginning of year 0Cash at the end of the year $ 200
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Income Statement for Year ended June 30, 2010Revenues $ 8,000Less: Expenses ( 6,000)Net income $ 2,000
Statement of Retained Earnings for Year ended June 30, 2010Beginning balance, retained earnings $ 0Add: Net income 2,000Deduct: Cash dividends (800)Ending balance, retained earnings $ 1,200
Relationship among Financial Statements Top of the World Example
Balance Sheets June 30, 2010 July 1, 2009
Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0
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The Conceptual Framework: Foundation for Financial Statements
Aids accountants in their role as interpreters and communicators of relevant information
Acts as a foundation for the specific principles and standards needed by the profession
LO6
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Financial Statement Assumptions
EconomicEntity
ConceptCost
Principle
GoingConcern
MonetaryUnit
TimePeriod
Assumption
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Economic Entity ConceptEach entity has its own books,
records, and financial statements that are separate from owners
No intermingling of personal and business assets and liabilities or income and expenses
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Cost PrincipleRecord assets at cost paid to
acquire them
Continue to value assets at historical cost until sold
More objective than market value
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Going Concern
Assume business will continue indefinitely into the future
Justifies use of historical cost
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Monetary UnitHow we measure amounts in the
financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.)
Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements
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Generally Accepted Accounting Principles
The various methods, rules, practices and other procedures that have evolved over time that regulates the preparation of financial statements
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Accounting as a Social ScienceAccounting is a service activityAccounting is a social science, not a physical
scienceAccounting principles develop in response to
changing business conditions
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The Rules of the Game
GAAP FASB
SEC
AICPA
The rules The rule makers The rule enforcers The CPA regulators
LO7
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International Accounting Standards
International Accounting Standards Board was created in 2001
There may be significant differences between U.S. and international standards
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Auditing
Financial statements are prepared by
and are the responsibility of the company’s management
External auditors performs tests and procedures to render an opinion as to the financial statements are fairly presented
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Ethics in Accounting
1. Identify the ethical dilemma
2. Analyze key elements
3. Determine the alternatives
4. Resolve by selecting ethical alternative
LO8
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The Changing Face of the Accounting Profession
A “financial reporting crisis” caused by:
Enron: the omission of entities from the financial statements WorldCom: treating costs as assets rather
than expenses causing higher net income
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Sarbanes-Oxley ActProvisions of the act: Established the Public Company Accounting
Oversight Board Required external auditors to report directly to
the company’s audit committee Prohibits external auditors from providing other
services compromising independence
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End of Chapter 1