The function of education is to teach one to think intensively and to think critically... Intelligence plus character –

1. The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education. — Martin Luther King Jr., American civil rights leader (1929-1968)

2. THE PURPOSE OF ACCOUNTING • FINANCIAL INFORMATION • ABOUT A BUSINESS • TO INDIVIDUALS • AND ORGANIZATIONS TO PROVIDE:

3. Forms of Business Organization • Sole proprietorship • Partnership • Corporation

4. Sole Proprietorship • Business owned by one person • Simple to establish • Owner controlled • Tax advantages • Owner personally liable • Financing difficult

5. Partnership • Two or more owners • Simple to establish • Shared control • Broader skills & resources • Tax advantages • Personal liability

6. Corporation • Separate legal entity owned by stockholders • Easy to transfer ownership • Greater capital raising potential • Lower legal liability • Unfavorable tax treatment

7. THE ACCOUNTING PROCESS Accounting Is A System Of: • Gathering financial information • About a business • And reporting it to users It is accomplished in 6 steps:

8. STEP ONE ANALYZING Looking at events that have taken place and thinking about how they affect the business

9. STEP TWO RECORDING Entering financial information about events into the accounting system

10. STEP THREE CLASSIFYING Sorting and grouping similar items together

11. STEP FOUR SUMMARIZING Bringing the various items of information together to determine a result

12. STEP FIVE REPORTING Giving the results to interested parties

13. STEP SIX INTERPRETING Deciding the meaning and importance of the information in various reports

14. Study Objectives of Chapter 1 • Understand the content and purpose of each of the financial statements. • Clarify the meaning of assets, liabilities, and stockholders’ equity. • Learn what the basic accounting equation tells us about a business. • Describe the components that supplement the financial statements in an annual report.

15. Study Objectives of Chapter 1 • Identify the users and uses of accounting information. • Explain the 3 principal business activities that affect cash.

16. Define some terms: • Sales • Revenue • Expense • Asset • Liability • Owner’s Equity

17. Content and Purpose of Financial Statements • Businesses tell users how they are doing through four financial statements: • How would you answer the question, “How is your business doing?”

18. Four Financial Statements • Income Statement • Retained Earnings Statement • Balance Sheet • Statement of Cash Flows Over Time Over Time At some point in Time Over Time

19. Income Statement • Did you make any money??? • Summarizes revenues and expenses for period: month, quarter, year. • If revenue > expense = Net Income.

20. Income Statement Do this statement first!

21. Retained Earnings Statement • Shows changes in retained earnings for period: month, quarter, year • Beginning balance • AddNet Income from income statement. • Deduct Dividends • Ending balance

22. Retained Earnings Statement Do this statement second!

23. Balance Sheet • Reports assetsand claims to assets. • Claims of creditors, liabilities. • Claims of owners, stockholders’ equity. • Assets = Liabilities + Stockholders’ Equity • Specific date – one point in time!

24. Balance Sheet From Retained Earnings Statement

25. Statement of Cash Flows • Provides information about cash receipts and cash payments • Summarizes for period: month, quarter, year. • Cash effects of operating, investing, and financing activities.

26. Statement of Cash Flows • Where did the cash come from? • How was cash used during the period? • What was the change in the cash balance during the period? • A company cannot survive without cash!

27. Statement of Cash Flows.. Agrees withBalance Sheet

28. Three Business Activities that affect Cash • Operating • Investing • Financing

29. Operating Activities • Revenuesare the increases in assets resulting from the sale of a product or service • Expenses are the cost of assets consumed or services used in generating revenue. • If revenue > expense =Net Income • If revenue < expense =Net Loss!

30. Operating Activities • What the business does to make money; • Selling goods • Providing services • Manufacturing • Cost of Sales • Advertising • Paying employees • Paying utilities

31. Investing Activities • Investments in the company’s future (Obtaining resources or assets to operate the business) • Land • Buildings • Vehicles • Computers • Furniture • Equipment

32. Financing Activities – Raising money to finance the business • Borrowing createsliabilities • Bank loans • Debt securities • Goods on credit or payables • Selling stockcreates stockholders’ equity

33. Statement of Cash Flows • To be continued in chapter 13.

34. Users of Financial InformationInternal • Internal vs. • External

35. Assets • Resources owned by the business to be used to generate future revenue • Cash • Accounts receivable • Inventories • Furniture and fixtures • Equipment • Supplies

36. Liabilities • Obligations or debts of the business • Notes payable • Accounts payable • Interest payable • Salaries payable • Unearned revenue

37. Stockholders’ Equity • Ownership claims on assets • Paid-in capital • Common stock • Retained earnings

38. Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity

39. Question 1 Which is notone of the three forms of business organization? a.Sole proprietorship. b.Creditorship. c.Partnership. d.Corporation.

40. Question 2 Which is an advantage of corporations relative to partnerships and sole proprietorships? a. Lower taxes. b. Harder to transfer ownership c.Reduced legal liability for investors. d. Most common form of business organization.

41. Question 3 Which is notone of the three primary business activities that affect cash? a.Financing. b. Operating. c.Advertising. d.Investing.

42. Question 4 Which of the following is not a correct representation of the accounting equation? a. Assets = Liabilities + Stockholders’ Equity b. Assets - Liabilities = Stockholders’ Equity c. Assets + Stockholders’ Equity = Liabilities d. Assets - Stockholders’ Equity = Liabilities

43. Question 5 Using the accounting equation, answer the following question. If Liabilities = $10,000 and Stockholders’ Equity = $20,000 Then Assets =

44. Question 6 Using the accounting equation, answer the following question. If Assets = $75,000 And Liabilities = $35,000 Then Stockholders’ Equity =

45. ANSWERS

46. Question 1 Which is notone of the three forms of business organization? a.Sole proprietorship. b.Creditorship. c.Partnership. d.Corporation.

47. Question 2 Which is an advantage of corporations relative to partnerships and sole proprietorships? a. Lower taxes. b. Harder to transfer ownership c. Reduced legal liability for investors. d. Most common form of business organization.

48. Question 3 Which is notone of the three primary business activities that affect cash? a.Financing. b. Operating. c.Advertising. d.Investing.

49. Question 4 Which of the following is not a correct representation of the accounting equation? a. Assets = Liabilities + Stockholders’ Equity b. Assets - Liabilities = Stockholders’ Equity c. Assets + Stockholders’ Equity = Liabilities d. Assets - Stockholders’ Equity = Liabilities

50. Question 5 Using the accounting equation, answer the following question. If Liabilities = $10,000 and Stockholders’ Equity = $20,000 Then Assets = $30,000 $30,000 = $10,000 + $20,000