Chapter 1 Accounting as a Form of Communication © 2019 Cengage. All rights reserved. Module 1: The nature of Business • • • Consists of activities necessary to provide members of society with goods and services. Certain business activities focus on providing goods or products Companies can: produce or manufacture the products distribute the products sell directly to the consumer • Suppliers, manufacturers, wholesalers, and retailers are examples of product companies © 2019to Cengage. All rights reserved. Introduction Cost management Exhibit 1.1—Types of Businesses © 2019 Cengage. All rights reserved. Exhibit 1.2—Forms of Organization © 2019 Cengage. All rights reserved. Business Entities • • Sole Proprietorships: organization with a single owner Partnerships: business owned by two or more individuals – Often used by accounting firms and law firms • Corporations: entity organized under the laws of a particular state – Ownership evidenced by shares of stock © 2019to Cengage. All rights reserved. Introduction Cost management Nonbusiness Entities • • • Nonbusiness Entities Organization operated for some purpose other than to earn a profit Do not have an identifiable owner © 2019to Cengage. All rights reserved. Introduction Cost management Organizations and Social Responsibility • U.S. business entities recognize the societal aspects of their overall mission and have established programs to meet these responsibilities • *Abbasi, Ehtesham Husain, Singh, A., Constantinescu, M., Khan, A. and Naseem, M. (2017) Making Indian Companies CDM Compatible: Towards a Green Financial Strategy, International Journal of Green Economics, InderScience Publishers, Geneva, Switzerland, Vol. 11, No. 1, 62-76. (ISSN: Online: 1744-9936 ISSN print: 1744-9928) Scopus and ABDC indexed © 2019to Cengage. All rights reserved. Introduction Cost management Nature of Business Activity • Financing Activities – Borrowing – Sale of stock • Investing Activities – Purchase and sale of assets • Operating Activities – Sale of Products/Services – Costs incurred to operate business © 2019to Cengage. All rights reserved. Introduction Cost management Exhibit 1.3—A Model of Business Activities © 2019 Cengage. All rights reserved. What is Accounting? Identifying Measuring Communicating Economic Information Various users • Management • Stockholders • Creditors • Financial analysists • Government © 2019to Cengage. All rights reserved. Introduction Cost management Exhibit 1.4—Users of Accounting Information © 2019 Cengage. All rights reserved. The Accounting Equation • • • • Assets = Liabilities + Owners’ Equity Left side: valuable economic resources and that will provide future benefit to the company Right side: indicates who provided, or has a claim to, the assets Stockholders’ equity, or shareholders’ equity: used to refer to the owners’ equity of a corporation © 2019to Cengage. All rights reserved. Introduction Cost management Source of Stockholders’ Equity • • Created when a company issues stock to an investor Retained earnings: earnings accumulated or retained by the company © 2019to Cengage. All rights reserved. Introduction Cost management The Balance Sheet • • Financial statement that summarizes the assets, liabilities, and owners’ equity of a company At any point in time, assets must equal liabilities and owners’ equity © 2019to Cengage. All rights reserved. Introduction Cost management Example 1.4—Preparing a Balance Sheet © 2019 Cengage. All rights reserved. The Income Statement • Summarizes the revenues and expenses of a company for a period of time © 2019to Cengage. All rights reserved. Introduction Cost management Example 1.5—Preparing an Income Statement © 2019 Cengage. All rights reserved. The Statement of Retained Earnings • • Summarizes the income earned and dividends paid over the life of a business Dividends: Distribution of the net income of a business to its owners © 2019to Cengage. All rights reserved. Introduction Cost management Example 1.6—Preparing a Statement of Retained Earnings © 2019 Cengage. All rights reserved. The Statement of Cash Flows • Summarizes a company’s cash receipts and cash payments during the period from operating, investing, and financing activities © 2019to Cengage. All rights reserved. Introduction Cost management Example 1.7—Preparing a Statement of Cash Flows © 2019 Cengage. All rights reserved. Exhibit 1.6—Relationships Among the Financial Statements © 2019 Cengage. All rights reserved. Financial Statement Assumptions • • • • • Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption © 2019to Cengage. All rights reserved. Introduction Cost management Economic entity concept • • • Single, identifiable unit must be accounted for in all situations Specific entity be the subject of a set of financial statements Does not intermingle the personal assets and liabilities of the employees or any of the other stockholders © 2019to Cengage. All rights reserved. Introduction Cost management Cost principle • Assets are recorded at the cost to acquire them – Original cost or historical cost—until the company disposes them • More objective than market value © 2019to Cengage. All rights reserved. Introduction Cost management Going Concern • • Assume entity will continue indefinitely into the future Justifies use of historical cost © 2019to Cengage. All rights reserved. Introduction Cost management Monetary Unit • Yardstick used to measure amounts in financial statements – Example: U.S. dollar, Japanese yen, Mexican peso, etc. • Assumes monetary unit is relatively stable; no adjustment for inflation made in financial statements © 2019to Cengage. All rights reserved. Introduction Cost management Time Period Assumption • • Artificial segment on the calendar used as the basis for preparing financial statements Accountants assume that it is possible to prepare an income statement that accurately reflects net income or earnings for a specific time period © 2019to Cengage. All rights reserved. Introduction Cost management Setting Accounting Standards (1 of 2) • Generally accepted accounting principles (GAAP) – Various methods, rules, practices, and other procedures—preparing financial statements • Securities and Exchange Commission (SEC) – Federal agency with ultimate authority to determine the rules for preparing statements • Financial Accounting Standards Board (FASB) – Authority to set accounting standards © 2019to Cengage. All rights reserved. Introduction Cost management Setting Accounting Standards (2 of 2) • American Institute of Certified Public Accountants (AICPA) – Professional organization of Certified Public Accountants (CPA) • Public Company Accounting Oversight Board (PCAOB) The Sarbanes Oxley Act of 2002 – Five-member body created by an act of Congress in 2002 to set auditing standards • International Accounting Standards Board (IASB) – Develop worldwide accounting standards © 2019to Cengage. All rights reserved. Introduction Cost management Audit of Financial Statements • • Most stockholders are not actively involved in the daily affairs of the business Auditing: examining whether financial statements are fairly presented – External auditor performs various tests and procedures and render his opinion Auditors’ report is an opinion, not a statement of fact © 2019to Cengage. All rights reserved. Introduction Cost management Ethics in Accounting • • • Ethics plays a critical role in providing useful financial information Investors and other users must have confidence in a company, its accountants, and its outside auditors that the information presented in financial statements is relevant, complete, neutral, and free from error Moral and social ethical behavior must be considered while decision making © 2019to Cengage. All rights reserved. Introduction Cost management Exhibit 1.9—Ethics and Accounting: A Decision-Making Model © 2019 Cengage. All rights reserved.
