the role of accounting in business

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The Role of Accounting in Business

CHAPTER 1


Learning Objectives

After studying this chapter, you should be able to:•Describe the types and forms of businesses, how businesses make money, and business stakeholders•Describe the three business activities of financing, investing, and operating•Define accounting and describe its role in business•Describe and illustrate the basic financial statements and how they interrelate•Describe eight accounting concepts underlying financial reporting•Financial Analysis: Describe and illustrate how the rate of return on assets can be used to analyze and assess a company’s financial performance


Describe the types and forms of businesses, how businesses make money, and business stakeholders

Learning Objective 1


Types of Businesses_____ businesses provide services rather than products to customers. Delta Air Lines (transportation services) The Walt Disney Company (entertainment services)

_____ businesses sell products they purchase from other businesses to customers. Walmart (general merchandise) Amazon.com (books, music, videos)

_____ businesses change basic inputs into products that are sold to customers. General Motors Corporation (cars, trucks, vans) Dell Inc. (personal computers)


Forms of Business

• __________• __________• __________• __________


Differences in Forms of Business

Organizational Form

Ease of Formation

Legal Liability Taxation

Limitation on Life of

EntityAccess to

CapitalProprietorship Simple _________ _________ Yes __________

Partnership Simple _________ _________ Yes __________

Corporation Complex _________ _________ No __________

Limited Liability Company

Moderate _________ _________ Yes __________


How do Businesses Make Money?

• By providing goods and services to customers so that they can make a _____

• To maximize their profits, companies may use one of the following two strategies:• __________• __________


How do Businesses Make Money?


Business Stakeholders

Business Stakeholder Interest in the Business Examples____________ Providers of major financing

for the businessBanks, owners,

stockholders

_____________ Buyers of products or services and vendors to the business

Customers and suppliers

______________ Collect taxes and fees from the business and its employees

Federal, state, and city governments

______________ Individual employed by the business

Employees and managers


Business Stakeholders



Describe the three business activities of financing, investing, and operating


Business Activities

• _______________

_______________ _______________ _______________

• _______________ _______________• ______________ _______________

• _______________

_______________•

_______________ _______________



Define accounting and describe its role in business


Objectives of Financial Accounting

• Sometimes called the “___________________”, accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business

• Essentially, it summarizes the financial performance of the firm for external users

• The two major objectives of financial accounting are:• To report the financial condition of a business at a

point in time• To report changes in the financial condition of a

business over a period of time


Two Major Objectives of Financial Accounting

Financial ConditionAs at a _______________

Financial ConditionOver a _______________



Describe and illustrate the basic financial statements and how they interrelate


Financial Statements

• ______________________• ______________________• ______________________• ______________________


Income Statement

• Summary of revenue and expenses for a specific period of time (e.g., month, quarter, or year)

• Reports the change in financial condition due to the operations of a business

• Uses the _____ concept: Expenses for the period are matched against revenues for the same period

_____________ – ___________ = ________________


Retained Earnings Statement

• Reports changes in financial condition due to changes in retained earnings during a period

• Retained earnings is the portion of ________ retained by the business


Balance Sheet

• Reports financial condition at a point in time• Measured by total assets and claims to those assets:

_________ = ____________ + _________


Balance Sheet – Preparation

• Step 1: Each asset is listed and added to arrive at total assets

• Step 2: Each liability is listed and added to arrive at total liabilities

• Step 3: Each stockholders’ equity item is listed and added to arrive at total stockholders’ equity

• Step 4: Total liabilities and total stockholder’s equity are added together

• Step 5: __________ must equal total liabilities and stockholders’ equity


Statement of Cash Flows

• Reports the change in financial condition due to the changes in cash during a period

— Net change in operating cash flows— Net change in investing cash flows— Net change in financing cash flows


Statement of Cash Flows – Operating Activities

• Net cash flows from operating activities is reported first

• Cash flow from operating activities is a focus of stakeholders

• Operating activities are transactions that involve the acquisition or production of products and services and the sale of those products or services to customers


Statement of Cash Flows – Investing Activities

• Net cash flows from investing activities is reported second

• Cash receipts from selling property, plant, and equipment are reported in this section

• Cash used to purchase property, plant, and equipment is also reported in this section

• Negative cash flow from investing activities is normal for an expanding company


Statement of Cash Flows – Financing Activities

• Net cash flows from financing activities is reported third

• Any cash receipts from issuing debt or stock are reported in this section

• Cash payments on debt and dividends are also reported in this section


Integrated Financial Statements


Integrated Financial Statements

• Net income from the income statement is linked to the ____________

• Retained earnings is linked to the stockholders’ equity in the ____________

• Cash balance from the ____________ is linked to cash in the balance sheet



Describe eight accounting concepts underlying financial reporting


The Accounting “Rules”

GAAP - G_____ A_____ A_____ P_____


Eight Accounting Concepts


Financial History of a Company


Accounting Frauds


Guidelines for Ethical Conduct



Financial Analysis: Describe and illustrate how the rate of return on assets can be used to analyze and assess a company’s financial performance


Rate of Return on Assets

• A measure of a company’s profitability

• Expressed as a percentage or as an amount per dollar invested• For example: a 12% rate of return on assets

could also be expressed as $0.12 return per $1 invested

_____ _____ ______


___ ____ ____ ___ ___ ____ _____=



• Apple is 3.8 (38.1% 4 10.7%) times more profitable than Dell Inc.


End of Chapter 1

the role of accounting in business

Documents

publically accessible

forms of businesses

types of businesses

learning objectivesafter

role of accounting

business stakeholdersdescribe

accounting concepts

operatingdefine accounting