The Role of Accounting in Business

1. The Role of Accounting in Business CHAPTER 1

2. 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

3. Describe the types and forms of businesses, how businesses make money, and business stakeholders Learning Objective 1

4. Types of Businesses _____ businesses provide services rather than products to customers. Delta Air Lines (transportation services) The Walt DisneyCompany (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)

5. __________ __________ __________ __________ Forms of Business

6. Differences in Forms of Business

7. 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: • __________ • __________

8. How do Businesses Make Money?

9. Business Stakeholders

10. Business Stakeholders

11. Learning Objective 2 Describe the three business activities of financing, investing, and operating

12. Business Activities • _______________ _______________ _______________ _______________ • _______________ _______________ • _______________ _______________ • _______________ _______________ • ______________ _______________

13. Learning Objective 3 Define accounting and describe its role in business

14. 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

15. Two Major Objectives of Financial Accounting Financial Condition As at a _____ __________ Financial Condition Over a _____ __________

16. Learning Objective 4 Describe and illustrate the basic financial statements and how they interrelate

17. Financial Statements • ______________________ • ______________________ • ______________________ • ______________________

18. 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 _____________ – ___________ = ________________

19. 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

20. Balance Sheet • Reports financial condition at a point in time • Measured by total assets and claims to those assets: _________ = ____________ + _________

21. 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

22. 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

23. 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

24. 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

25. 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

26. Integrated Financial Statements

27. 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

28. Learning Objective 5 Describe eight accounting concepts underlying financial reporting

29. The Accounting “Rules” GAAP - G_____ A_____ A_____ P_____

30. Eight Accounting Concepts

31. Financial History of a Company

32. Accounting Frauds

33. Guidelines for Ethical Conduct

34. Learning Objective 6 Financial Analysis: Describe and illustrate how the rate of return on assets can be used to analyze and assess a company’s financial performance

35. 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 ___ ____ ____ ___ ___ ____ _____ Rate of Return on Assets = _____ _____ ______

36. Rate of Return on Assets Apple is 3.8 (38.1% 4 10.7%) times more profitable than Dell Inc.

37. End of Chapter 1