Chapter 1

1. © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 1 Introduction to Accounting and Business Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

2. Some of the action has been automated, so click the mouse when you see this lighting bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen. Like right now.

3. Objectives 1.Describe the nature of a business. 2.Describe the role of accounting in business. 3. Describe the importance of business ethics and the basic principles of proper ethical conduct. 4.Describe the profession of accounting. 5.Summarize the development of accounting principles and relate them to practice. 6. State the accounting equation and define each element of the equation. After studying this chapter, you should be able to:

4. Objectives 7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. 8. Describe the financial statements of a proprietorship and explain how they interrelate. 9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.

5. Product General Motors Cars, trucks, vans Intel Computer chips Boeing Jet aircraft Nike Athletic shoes and apparel Coca-Cola Beverages Sony Stereos and television Types of Businesses Manufacturing Business

6. Product Wal-Mart General merchandise Toys “R” Us Toys Circuit City Consumer electronics Lands’ End Apparel Amazon.com Internet books, music, video retailer Types of Businesses Merchandising Business

7. Product Disney Entertainment Delta Air Lines Transportation Marriott Hotels Hospitality and lodging Merrill Lynch Financial advice Sprint Telecommunication Types of Businesses Service Business

8. There are three types of business organizations • Proprietorship • Partnership • Corporation

9. A proprietorshipis owned by one individual. • Advantages • Ease in organizing • Low cost of organizing • Disadvantage • Limited source of financial resources • Unlimited liability Joe’s

10. Advantages • More financial resources than a proprietorship. • Additional management skills. A partnership is owned by two or more individuals. • Disadvantage • Unlimited liability. Joe and Marty’s

11. A corporation is organized under state or federal statutes as a separate legal entity. • Advantage • The ability to obtain large amounts of resources by issuing stocks. • Disadvantage • Double taxation. J & M, Inc.

12. Business Strategies Abusiness strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

13. Business Strategies Under alow-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Wal-Mart Southwest Airlines

14. Business Strategies Under adifferential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price. Maytag Tommy Hilfiger

15. Value Chain of a Business A value chain is the way a business adds value for its customers by processing inputs into product or service. Inputs Business Processes Products or Services Customer Value

16. Business Stakeholders A business stakeholderis a person orentity having an interest in the economic performance of the business.

17. STAKEHOLDERS External: Customers, creditors, government Internal: Owners, managers, employees Identify stake-holders. 1 Assess stakeholders’ informational needs. 2 The Process of Providing Information

18. Design the accounting information system to meet stakeholders’ needs. Record economic data about business activities and events. 3 4 The Process of Providing Information Accounting Information System

19. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Prepare accounting reports for stakeholders. 5 The Process of Providing Information Accounting Information System

20. Business Ethics 1. Avoid small ethical lapses. 2. Focus on your long-term reputation. 3. You may expect to suffer adverse personal consequences for holding to an ethical position. Sound Principles that form the foundation for ethical behavior

21. Profession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

22. Generally Accepted Accounting Principles (GAAP)

23. The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

24. The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.

25. The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

26. The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

27. The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

28. What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

29. On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.

30. Assets Owner’s Equity = Chris Clark, Capital 25,000 Investment by Chris Clark Cash 25,000 = a. a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

31. Bal. 5,000 20,000 25,000 b. NetSolutions exchanged $20,000 for land. Assets Owner’s Equity = Chris Clark, Capital 25,000 Cash + Land 25,000 Bal. = b. –20,000 +20,000

32. Bal. 5,000 1,350 20,000 1,350 25,000 c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350

33. Bal. 12,500 1,350 20,000 1,350 32,500 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital Bal. 5,000 1,350 20,000 1,350 25,000 = Fees earned d.+ 7,500 + 7,500

34. e. – 3,650 –2,125 – 800 – 450 – 275 Wages Rent Util. Misc. • Bal. 8,850 1,350 20,000 1,350 28,850 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital Bal. 12,500 1,350 20,000 1,350 32,500 =

35. Bal. 7,900 1,350 20,000 400 28,850 f. NetSolutions paid $950 to creditors during the month. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 8,850 1,350 20,000 1,350 28,850 f. – 950 – 950

36. Bal. 7,900 550 20,000 400 28,050 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 7,900 1,350 20,000 400 28,850 Supplies expense g. – 800 – 800

37. Bal. 5,900 550 20,000 400 26,050 h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 7,900 550 20,000 400 28,050 With-drawal h. –2,000 –2,000

38. Decreased by Increased by Owner’s withdrawals Expenses Owner’s investments Revenues Net income Effects of Transactions on Owner’s Equity Owner’s Equity

39. Accounting reports, called financial statements, provide summarized information to the owner.

40. Financial Statements • Income statement—A summary of the revenue and expenses for a specific period of time. • Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time. • Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date. • Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

41. NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned $7 500 00 Operating expenses: Wages expense $2 125 00 Rent expense 800 00 Supplies expense 800 00 Utilities expense 450 00 Miscellaneous expense 275 00 Total operating expenses 1 135 00 To the statement of owner’s equity Net income $3 050 00

42. Investment on November 1 $25 000 00 Net income for November 3 050 00 $28 050 00 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Chris Clark, capital, November 1, 2005 $ 0 From the income statement Less withdrawals 2 000 00 Increase in owner’s equity 26 050 00 Chris Clark, capital, November 30, 2005 $26 050 00 To the balance sheet

43. NetSolutions Balance Sheet November 30, 2005 From the statement of owner’s equity Assets Liabilities Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Owner’s Equity Land 20 000 00 Chris Clark, cap. 26 050 00 Total liabilities and Total assets $26 450 00 owner’s equity $26 450 00 This balance sheet presented using the accountform

44. When the balance sheet displays the liabilities and owner’s equity below the assets, the reportform is being used.

45. NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 Cash flows from financing activities: Cash received as owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00 ) Should match Cash on the balance sheet

46. Statement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

47. Total Liabilities Total owner’s equity (or total stockholders’ equity) Ratio of liabilities to owner’s equity = Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions.

48. Ratio of liabilities to owner’s equity $400 $26,050 = Ratio of liabilities to owner’s equity 0.015 = Tools for Financial Analysis and Interpretation

49. Chapter 1 The End