Accounting and the Business Environment

1. Accounting and the Business Environment Summary

2. Learning Objectives • Explain why accounting is important and list the users of accounting information • Describe the organizations and rules that govern accounting • Describe the accounting equation, and define assets, liabilities, and equity

3. Learning Objectives • Use the accounting equation to analyze transactions • Prepare financial statements • Use financial statements and return on assets (ROA) to evaluate business performance

4. Learning Objective 1 Explain why accounting is important and list the users of accounting information

5. Why Is Accounting Important? Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Financial Accounting Managerial Accounting

6. Users of Financial Information

7. >TRY IT!

8. >TRY IT!

9. >TRY IT!

10. >TRY IT!

11. >TRY IT!

12. >TRY IT!

13. >TRY IT!

14. Learning Objective 2 Describe the organizations and rules that govern accounting

15. The Organizations That Govern Accounting FASB • Financial Accounting Standards Board • Privately funded • Creates the rules and standards that govern financial accounting SEC • Securities and Exchange Commission • Oversees the US financial markets

16. Generally Accepted Accounting Principles (GAAP) • Issued by the FASB. • Establishes the rules for recording transactions and preparing financial statements. • Published online as part of the Accounting Standards Codification. • Requires that information be useful. Relevant = The info allows users to make a decision. Faithfully Representative = The info is complete, neutral, and free from material error.

17. Accounting Assumptions Economic Entity Assumption Cost Principle Monetary Unit Assumption Going Concern Assumption

18. >TRY IT!

19. >TRY IT!

20. >TRY IT!

21. >TRY IT!

22. >TRY IT!

23. >TRY IT!

24. >TRY IT!

25. >TRY IT!

26. >TRY IT!

27. >TRY IT!

28. Learning Objective 3 Describe the accounting equation, and define assets, liabilities, and equity

29. The Accounting Equation Assets Liabilities Equity = + Rule: The Balance Sheet Equation must ALWAYS be in balance.

30. The Accounting Equation Assets Liabilities Equity = + Inventory Assets are economic resources that are expected to benefit the business in the future. Land Cash Furniture

31. The Accounting Equation Assets Liabilities Equity = + Accounts Payable Liabilities are debts that are owed to creditors. Notes Payable Salaries Payable

32. The Accounting Equation Assets Liabilities Equity = + Equity is the owner’s residual claim against the assets of the company. Owner’s Capital Owner’s With-drawals

33. The Accounting Equation Assets Liabilities Equity = + The owner’s claim on the resources increase and decrease as the company engages in earnings activities. Owner’s Capital – Owner’s Withdrawals + Revenues - Expenses

34. The Accounting Equation Assets Liabilities Equity = + Revenues are economic resources that have been earned by delivering products or services to customers. Owner’s Capital – Owner’s Withdrawals + Revenues - Expenses

35. The Accounting Equation Assets Liabilities Equity = + Expenses are the costs associated with selling goods or services. Owner’s Capital – Owner’s Withdrawals + Revenues - Expenses

36. >TRY IT!

37. >TRY IT!

38. Learning Objective 4 Use the accounting equation to analyze transactions

39. How Do You Analyze A Transaction? Think of a transaction as a very special kind of historical event. • It involves the exchange of economic resources. • We must be able to measure the economic impact in monetary units. • Is it a transaction? • Buying a copying machine for the office for $4,000 cash. • Meeting with a potential customer.

40. How Do You Analyze A Transaction? Sheena Bright starts a new business named Smart Touch. She puts $30,000 into the business. How does this impact the Accounting Equation? Note: You can make the analysis easier if the first question you ask is whether cash exchanged hands.

41. How Do You Analyze A Transaction? Next, Smart Touch purchases land for $20,000 cash. In this transaction, all the change occurred on the left side of the equation. One asset was converted into a different asset.

42. How Do You Analyze A Transaction? In Transaction #3, Smart Touch buys $500 of office supplies, offering to pay in 30 days. Remember, in business it is quite common for a business to purchase something now, and pay for it later.

43. How Do You Analyze A Transaction? In Transaction #4, Smart Touch provides training services to customers for $5,500 cash.

44. How Do You Analyze A Transaction? In Transaction #5, Smart Touch performs $3,000 of services for a customer who will pay in one month.

45. How Do You Analyze A Transaction? In Transaction #6, Smart Touch pays $3,200 in cash expenses; $2,000 for office rent and $1,200 for employee salaries.

46. How Do You Analyze A Transaction? In Transaction #7, Smart Touch pays $300 to the store from which it purchased office supplies in Transaction #3.

47. How Do You Analyze A Transaction? In Transaction #8, Smart Touch collects $2,000 from the client for which Smart Touch performed services in Transaction #5.

48. LO4: How Do You Analyze A Transaction?

49. Learning Objective 5 Prepare Financial Statements

50. How Do You Prepare Financial Statements? Income Statement These same four basic financial statements are used by all companies as the primary means of communicating to stakeholders. Statement of Owner’s Equity Balance Sheet Statement of Cash Flows