ACCOUNTING 2-MANAGERIAL ACCOUNTING
o Chapter 1: INTRODUCTION TO ACCOUNTING
AND BUSINESS
Teacher Version
Learning Objectives
1.
2.
3.
4.
5.
6.
Describe the nature of a business and the role of
accounting and ethics in business.
Summarize the development of accounting principles and
relate them to practice.
State the accounting equation and define each element of
the equation.
Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements
of the accounting equation.
Describe the financial statements of a corporation and
explain how they interrelate.
Describe and illustrate the use of the ratio of liabilities to
stockholders’ equity in evaluating a company’s financial
condition.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature of Business and Accounting
o
A BUSINESS is an ORGANIZATION in which
basic resources (INPUTS) such as materials
and labor, are ASSEMBLED and PROCESSED
to provide goods or services (OUTPUTS) to
customers.
Nature of Business and Accounting
o
The objective of most businesses is to EARN a
PROFIT.
o
Profit is the DIFFERENCE between the
amounts RECEIVED from customers for
goods or services and the amounts PAID for
the INPUTS used to provide the goods or
services.
TYPES OF BUSINESSES
SERVICE BUSINESSES
SERVICE PROVIDED
DELTA AIR LINES
TRANSPORTATION SERVICES
WALT DISNEY COMPANY
ENTERTAINMENT SERVICES
MERCHANDISING BUSINESSES
PRODUCT PROVIDED
WALMART
GENERAL MERCHANDISE
AMAZON.COM
INTERNET BOOKS, MUSIC, VIDEOS
MANUFACTURING BUSINESSES
PRODUCT PROVIDED
FORD MOTOR COMPANY
CARS, TRUCKS, VANS
DELL
PERSONAL COMPUTERS
The Role of Accounting in Business
o
ACCOUNTING can be defined as an
information system that provides REPORTS to
users about the ECONOMIC ACTIVITIES
and CONDITION of a BUSINESS.
The Role of Accounting in Business
o The process by which accounting provides
information to users is as follows:
 IDENTIFY USERS
 ASSESS USERS’ INFORMATION NEEDS
 DESIGN THE ACCOUNTING INFORMATION
SYSTEM TO MEET USERS’ NEEDS
 RECORD ECONOMIC DATA ABOUT BUSINESS
ACTIVITIES AND EVENTS
 PREPARE ACCOUNTING REPORTS FOR USERS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
MANAGERIAL Accounting
o
The area of accounting that provides internal
users with information is called
MANAGERIAL ACCOUNTING or
MANAGEMENT ACCOUNTING .
o
MANAGERIAL accountants employed by a
business are employed in PRIVATE
accounting.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
FINANCIAL Accounting
o
The area of accounting that provides external
users with information is called FINANCIAL
ACCOUNTING.
o
The objective of financial accounting is to
provide RELEVANT and TIMELY information
for the DECISION-MAKING needs of users
OUTSIDE of the business.
o
General-purpose FINANCIAL STATEMENTS
are one type of financial accounting report
that is distributed to EXTERNAL users.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Role of Ethics in Accounting and Business
o
The objective of accounting is to provide
relevant, timely information for user
DECISION MAKING.
o
Accountants must behave in an ETHICAL
manner so that the information they provide
users will be TRUSTWORTHY and, thus,
USEFUL for decision making.
o
ETHICS are MORAL principles that guide
the CONDUCT of individuals.
Opportunities for Accountants
o
Accountants and their staffs who provide
services on a FEE BASIS are said to be
employed in PUBLIC accounting.
o
Accountants employed by a BUSINESS FIRM,
or a NOT-FOR-PROFIT ORGANIZATION
are said to be employed in PRIVATE
accounting.
o Public accountants who have met a STATES’S
EDUCATION, EXPERIENCE and EXAMINATION
requirements may become CERTIFIED PUBLIC
ACCOUNTANTS (CPA’S)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Generally Accepted Accounting Principles
o
Financial accountants follow GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) in preparing reports.
o
Within the U.S., the FINANCIAL
ACCOUNTING STANDARDS BOARD (FASB)
has the PRIMARY responsibility for
DEVELOPING accounting principles.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Generally Accepted Accounting
Principles
o The SECURITY AND EXCHANGE
COMMISSION(SEC), an AGENCY of the U.S.
government, has authority over the accounting
and financial DISCLOSURES for companies
whose SHARES of OWNERSHIP (STOCK) are
TRADED and sold to the PUBLIC.
o Many countries OUTSIDE the United States
use generally accepted accounting principles
adopted by the INTERNATIONAL
ACCOUNTING STANDARDS BOARD (IASB).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Business ENTITY Concept
o
Under the BUSINESS ENTITY concept, the
ACTIVITIES of a business are recorded
SEPARATELY from the activities of its
OWNERS, CREDITORS, or OTHER
BUSINESSES.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
A PROPRIETORSHIP
is owned by ONE
individual.

70% of business
entities in the U.S. are
proprietorships.

They are easy and
cheap to organize.

Resources are limited
to those of the owner.

Used by small
businesses.
A PARTNERSHIP is
similar to a
PROPRIETORSHIP
except that it is
owned by TWO or
MORE individuals.

10% of business
organizations in the
U.S. (combined
with limited
liability
companies) are
partnerships.

Combines the skills
and resources of
more than one
person.
A CORPORATION
is organized under
STATE or FEDERAL
statutes as a
separate LEGAL
TAXABLE entity.





Generates 90% of
business revenues.
20% of the business
organizations in the U.S.
Ownership is divided
into shares, called
stock.
Can obtain large
amounts of resources
by issuing stock.
Used by large
businesses.
A LIMITED
LIABILITY
COMPANY (LLC)
combines the
attributes of a
PARTNERSHIP and
a CORPORATION.

10% of business
organizations in the
U.S. (combined
with partnerships).

Often used as an
alternative to a
partnership.

Has tax and legal
liability advantages
for owners.
COST Concept
o Under the COST concept, amounts are
INITIALLY recorded in the accounting
records at their COST or PURCHASE PRICE.
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o
Aaron Publishers purchased a building on February 20,
2012, for $150,000. Other amounts related to this purchased
are shown.
• Price listed by seller on Jan. 1, 2012
$160,000
• Aaron Publishers’ initial offer to buy on
Jan. 31, 2012
• Purchase price on Feb. 20, 2012
140,000
150,000
• Estimated selling price on Dec. 31, 2014
220,000
• Assessed value for property taxes,
Dec. 31, 2014
190,000
• At what price will this be recorded on the books of Aaron
Publishers using the Cost Concept?
• $150,000
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
o
The OBJECTIVITY concept requires that the
amounts recorded in the accounting records
be based on OBJECTIVE evidence.
o
Only the FINAL AGREED-UPON amount is
OBJECTIVE enough to be recorded in the
accounting records.
The UNIT OF MEASURE concept requires that
ECONOMIC DATA be recorded in DOLLARS.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
The ACCOUNTING EQUATION
o The resources owned by a business are its
ASSETS.
o The rights of CREDITORS are the DEBTS of the
business and are called LIABILITIES.
o The rights of the OWNERS are called
STOCKHOLDER’S equity for a corporation and
OWNER’S equity for a proprietorship,
partnership, or limited liability company.
o The equation ASSETS = LIABILITIES +
OWNER’S EQUITY is called the ACCOUNTING
EQUATION.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
o
A BUSINESS transaction is an ECONOMIC
event or CONDITION that DIRECTLY
changes an entity’s FINANCIAL condition or
its results of OPERATIONS.
o The liability created by a purchase on
ACCOUNT is called an ACCOUNTS
PAYABLE.
o Items such as supplies that will be used in the
business in the FUTURE are called PREPAID
EXPENSES, which are assets.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
o REVENUE from providing services is recorded
as FEES EARNED.
o Revenue from the SALE of merchandise is
recorded as SALES.
o Other examples of revenue include rent, which
is recorded as RENT revenue, and INTEREST,
which is recorded as interest revenue.
o An account RECEIVABLE is a claim against a
CUSTOMER, which is an ASSET.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
You Should Note the Following:
o The effect of every transactions is an
INCREASE OR A DECREASE IN ONE OR
MOR OF THE ACCOUNTING EQUATION
ELEMENTS.
o The two sides of the accounting equations are
ALWAYS EQUAL.
o The stockholders’ equity (owner’s equity) is
INCREASED BY AMOUNTS INVESTED by
STOCKHOLDERS (CAPITAL STOCK).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
You Should Note the Following:
o The stockholders’ equity (owner’s equity) is
INCREASED BY REVENUE AND
DECREASED BY EXPENSES.
o The stockholders’ equity (OWNER’S EQUITY)
is decreased BY DIVIDENDS PAID to
stockholders.
o RETAINED EARNINGS is the
STOCKHOLDERS’ EQUITY created from
business operations through revenue and
EXPENSE transactions.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
FINANCIAL Statements
o
After transactions have been RECORDED and
SUMMARIZED, reports are prepared for
users. The accounting REPORTS providing this
information are called FINANCIAL
STATEMENTS.
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Income Statement
o The INCOME STATEMENT reports the revenues
and EXPENSES for a PERIOD of time, based on
the MATCHING concept.
o The MATCHING concept is applied by
“MATCHING” the EXPENSES incurred during a
period with the REVENUE that those EXPENSES
generated.
o The excess of the REVENUE over the EXPENSES
is called NET income, NET PROFIT, or
EARNINGS. If EXPENSES exceed REVENUE, the
EXCESS is a NET loss.
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Retained Earnings Statement
o
The RETAINED EARNINGS STATEMENT
reports the changes in the RETAINED
EARNINGS for a period of time.
o
It is prepared AFTER the income statement
because the NET INCOME or NET LOSS for
the PERIOD must be reported in this
statement.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
BALANCE SHEET
o
A balance sheet is a list of the ASSETS,
LIABILITIES, and STOCKHOLDERS’
EQUITY as of a SPECIFIC DATE.
o
The ACCOUNT form of a BALANCE SHEET
lists the assets on the LEFT and the
LIABILITIES and STOCKHOLDERS’
EQUITY on the right. It resembles the basic
format of the ACCOUNTING EQUATION.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
STATGEMENT of Cash FLOWS
o
A STATEMENT OF CASH FLOWS is a
summary of the cash RECEIPTS and cash
PAYMENTS for a SPECIFIC PERIOD of time.
 It consists of three sections:
(1) OPERATING ACTIVITIES
(2) INVESTING ACTIVITIES
(3) FINANCING ACTIVITIES
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
o
o
The cash flows from OPERATING
ACTIVITIES section reports a summary of
cash RECEIPTS and cash PAYMENTS from
operations.
The cash flows from INVESTING
ACTIVITIES section reports the cash
transactions for the ACQUISITION and SALE
of relatively permanent assets.
o
The cash flows from FINANCING
ACTIVITIES section reports the cash
TRANSACTIONS related to cash
INVESTMENTS by the OWNER,
BORROWINGS, and cash dividends
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
This amount should match CASH
on the BALANCE SHEET.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
RATIO OF
LIABILITIES TO
STOCKHOLDERS’
EQUITY
TOTAL LIABILITIES
=
Total STOCKHOLDERS’ Equity
Ratio of _________
=
to _________
Equity
$
$
= _______