Financial & Managerial
Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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1
Chapter 1
Uses of Accounting
Information and
the Financial
Statements
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2
LEARNING OBJECTIVES
• Define accounting, identify business goals
and activities, and describe the role of
accounting in making informed decisions.
• Identify the many users of accounting
information in society.
• Explain the importance of business
transactions, money measure, and separate
entity to accounting measurement.
• Describe the corporate form of business
organization.
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3
LEARNING OBJECTIVES
(continued)
• Define financial position, state the
accounting equation, and show how they
are affected by simple transactions.
• Identify the four financial statements.
• State the relationship of generally accepted
accounting principles (GAAP) to financial
statements and the independent CPA’s
report, and identify the organizations that
influence the GAAP.
• Define ethics and describe the ethical
responsibilities of accountants.
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4
Accounting as an Information System
OBJECTIVE 1
Define accounting, identify business
goals and activities, and describe
the role of accounting in making
informed decisions.
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5
• Today’s accountant focuses on the
ultimate needs of decision makers
who use accounting information,
whether those decision makers are
inside or outside the business.
• Accounting “is not an end in itself,”
but is an information system that
measures, processes, and
communicates financial information
about an identifiable economic
entity.
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6
• Accounting provides a vital service
by supplying the information that
decision makers, both inside and
outside the business, need to make
reasoned choices among alternative
uses of scarce resources in the
conduct of business and economic
activities.
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7
• Accounting is a link between
business activities and decision
makers.
• Accounting measures business
activities by recording data about
them for future use.
• The data are stored until needed
and then processed to become
useful information.
• The information is communicated,
through reports, to decision
makers.
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8
Data about business activities are
the input to the accounting system.
Useful information for decision
makers is the output.
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9
Accounting as an Information System
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10
Business Goals, Activities, and
Performance Measures
• A business is an economic unit
that aims to sell goods and
services to customers at prices
that will provide an adequate
return to its owners.
• Businesses, though diverse,
have similar goals and engage in
similar activities.
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11
Business Goals
Profitability
A business must take in enough
money to pay all the costs of doing
business, with enough left over as
profit for the owners to want to stay in
the business.
Liquidity
A business must have enough cash
available to pay debts when they are
due.
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12
Business Goals and Activities
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13
Business Activities
• Financing Activities.
• Obtaining capital from owners and
creditors.
• Repaying creditors and paying a return to
owners.
• Investing Activities.
• Spending the capital it receives in ways that
are productive and will help the business
achieve its objectives.
• Buying and selling assets to be used in the
business.
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14
Business Activities (continued)
• Operating Activities.
• Selling goods and services
to customers.
• Employing managers and
workers.
• Buying and producing goods
and services.
• Paying taxes.
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15
Performance Measures
Indicate whether managers are achieving
their business goals and if they are
managing business activities well.
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16
Performance Measures
Performance measures must align with business goals:
Performance Measure
Earned income.
Goal
Profitability.
Cash flow.
Liquidity.
Ratio of expenses to revenues.
Operating
performance level.
Financing
performance level.
Ratio of money owed to total
resources controlled.
Managers should understand and be motivated by
these measures.
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17
Financial and Management Accounting
Accounting’s role of assisting
decision makers by measuring,
processing, and communicating
information is usually divided into
two categories:
1. Management accounting.
2. Financial accounting.
The two may be distinguished by
the principal users of their
information.
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18
Management Accounting
• Is oriented toward the needs
of internal decision makers.
• Provides managers and
employees with information
regarding how they have done
in the past and what they can
expect in the future.
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19
Financial Accounting
• Is oriented toward the needs of external
decision makers.
• Provides information in the form of
financial statements to evaluate how well
the business has achieved its goals.
• Financial statements report directly on the
goals of profitability and liquidity.
• Financial statements are used extensively
both inside and outside a business to
evaluate the business’s success.
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20
Processing Accounting
Information
Accounting versus bookkeeping
•Bookkeeping is the mechanical and
repetitive process of recording financial
transactions and keeping financial records.
•Bookkeeping is a small part of accounting.
•Accounting includes the design of an
information system that meets user’s
needs.
•Accounting goals are the analysis,
interpretation, and use of information.
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21
Computers are used extensively in
accounting as a tool for the accountant.
A business’s information needs are
organized into a Management
Information System (MIS).
• An MIS consists of interconnected
subsystems of data collection.
• The Accounting Information System
(AIS) is the most important
subsystem.
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22
Discussion
Q.
What is the difference between
profitability and liquidity?
A.
Profitability means earning enough
income to attract and hold
investment capital.
Liquidity means being able to pay
debts when they fall due.
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23
Decision Makers: The Users of
Accounting Information
OBJECTIVE 2
Identify the many users of
accounting information in society.
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24
Decision Makers
The people who use accounting information
to make decisions fall into three categories:
1.
Management
2.
Outside users with a direct financial
interest.
3.
People, organizations, and agencies
with an indirect financial interest.
These categories apply both to profitoriented ventures as well as government and
not-for-profit organizations.
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25
The Users of Accounting Information
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26
Management
Requires financial information to carry out
its basic functions.
1.
Financing the business.
2.
Investing the resources of the
business.
3.
Producing goods and services.
4.
Marketing goods and services.
5.
Managing employees.
6.
Providing information to decision
makers.
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27
Users with
a Direct Financial Interest
• Investors - owners
• Creditors – lenders.
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28
Users with an Indirect Financial Interest
•
•
•
•
•
•
Tax Authorities.
Regulatory Agencies.
Labor Unions.
Investment Advisors.
The Financial Media.
Customers and
Consumer Groups.
• Economic Planners.
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29
Discussion
Q. Which decision makers use accounting
information?
A. Three groups of decision makers use
accounting information:
1.
Those who manage a business.
2.
Those outside a business enterprise who
have a direct financial interest in the
business.
3.
Those people, organizations, and
agencies that have an indirect financial
interest in the business.
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30
Accounting Measurement
OBJECTIVE 3
Explain the importance of business
transactions, money measure, and
separate entity to accounting
measurement.
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31
Four Basic Questions
1. What is measured?
2. When should the measurement be
made?
3. What value should be placed on
what is measured?
4. How should what is measured be
classified?
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32
What Is Measured?
• Business transactions:
• Economic events that affect the
financial position of a business
entity.
• Transactions are the raw material
of accounting reports.
• Transactions must relate directly
to a business entity.
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33
• Money Measure.
• Money is the only factor common to
all business transactions.
• The monetary unit a business uses
depends on the country in which the
business resides.
• Exchange rates translate one
currency to another.
• The Concept of Separate Entity.
• A business is a separate entity,
distinct from its creditors,
customers, and owners.
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34
Discussion
Q. Tell whether each of the following words or
phrases relates most closely to a:
(a) business transaction,
(b) separate entity, or
(c) money measure.
1. Partnership
2. U.S. dollar
3. Payment of an expense
4. Corporation
5. Sale of an asset
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35
A.
1. Partnership: (b)
KEY
(a) business
transaction
(b) separate
entity
(c) money
measure
2. U.S. dollar: (c)
3. Payment of an expense: (a)
4. Corporation: (b)
5. Sale of an asset: (a)
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36
The Corporation as a Separate
Entity
OBJECTIVE 4
Describe the corporate form of
business organization.
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37
Forms of Business Organization
• Sole Proprietorship.
• Partnership.
• Corporation.
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38
Sole Proprietorships
• Owned by one person.
• Records should be kept separate
from owner’s personal interests.
• Legally same economic unit as
owner.
• Unlimited liability.
• Ends when owner wants it to, or
owner dies.
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39
Partnerships
•
•
•
•
•
More than one owner.
Unincorporated association, not
legally separate from owners.
Unlimited liability.
Mutual agency, any partner can
bind all partners to a contract .
Ends when ownership changes,
e.g partner leaves or dies.
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40
Corporations
•
•
•
•
•
One or more owners (stockholders.)
Legally separate entity from owners.
Owners can be separate from managers.
Limited liability.
Unlimited life.
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41
Number and Receipts of U.S. Proprietorships,
Partnerships, and Corporations, 1997
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42
The Corporate Form of Business
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43
Organization of a Corporation
• To form a corporation, articles of
incorporation must be filed with and
approved by the state.
Stockholders are the owners of the corporation.
The Board of Directors is elected by the
stockholders to set policies and choose
officers.
Management consists of operating officers who
carry out the policies and run day-to-day
operations.
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44
Discussion
Q. How do sole proprietorships, partnerships,
and corporations differ?
A.
•
A sole proprietorship is a business
owned by one individual.
•
A partnership is similar in most respects
to a proprietorship except that more than
one owner is involved.
•
A corporation is an economic unit that is
legally separate from its owners.
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45
Financial Position and the
Accounting Equation
OBJECTIVE 5
Define financial position,
state the accounting equation, and
show how they are affected by
simple transactions.
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46
Financial Position
Economic Resources
= Equities.
= Creditors’ Equities + Owners’ Equity.
Assets = Liabilities
+ Owners’ Equity.
The Accounting Equation
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47
Assets
Assets are economic resources
owned by a business that are
expected to benefit future
operations.
• Monetary items.
• Nonmonetary physical items.
• Nonphysical items.
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48
Liabilities
Liabilities are present obligations of
a business to pay cash, transfer
assets, or provide services to other
entities in the future.
Liabilities are debts recognized by
law. Creditors must be paid before
stockholders.
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49
Owners’ Equity
the claims by the owner to the assets
of the business.
the residual equity that remains after
deducting liabilities from assets.
Owners’ Equity = Assets - Liabilities.
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50
Contributed Capital
• The amount invested in the
business by stockholders
• Typically, it comprises par value
stock and additional paid-incapital
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51
Retained Earnings
• Equity generated from the incomeproducing activities and kept for use in
the business.
Revenues and Expenses
• Increases and decreases in equity that
result from operating a business
Dividends
• Distributions to stockholders of assets
(usually cash) generated by past
earnings.
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52
Three Types of Transactions That
Affect Retained Earnings
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53
Net Income / Loss
Revenues > Expenses
Net Income
Revenues < Expenses
Net Loss
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54
Some Illustrative
Transactions
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55
T1. Owners’ Investments
Assets
Common
Stock
Cash
Beginning
Balance
Liabilities
Stockholders’
Equity
$0
$0
T1.
+$50,000
+$50,000
Ending
Balance
$50,000
$50,000
$50,000
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$50,000
56
T2. Purchase of Assets with Cash
Assets
Cash
Beginning
Balance
$50,000
T2.
-35,000
Ending
Balance
$15,000
Liabilities
Land
Building
Stockholders’
Equity
Common
Stock
$50,000
+$10,000 +$25,000
$10,000
$25,000
$50,000
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$50,000
$50,000
57
T3. Purchase of Assets by
Incurring a Liability
Assets
Cash
Beginning
Balance
Supplies
$15,000
T3.
Ending
Balance
Liabilities
Land
$10,000
Accounts Common
Stock
Building Payable
$25,000
+$500
$15,000
$500
Stockholders’
Equity
$50,000
+$500
$10,000
$25,000
$50,500
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$500 $50,000
$50,500
58
T4. Payment of a Liability
Assets
Cash
Beginning
Balance
Supplies
$15,000
T4.
-200
Ending
Balance
$14,800
Liabilities
$500
Land
$10,000
Stockholders’
Equity
Accounts Common
Stock
Building Payable
$25,000
$500 $50,000
-200
$500
$10,000
$25,000
$50,300
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$300 $50,000
$50,300
59
T5. Revenues Earned
Commission Received in Cash
Assets
Liabilities
Stockholders’ Equity
Retained
Earnings
Cash
Supplies
Land
Building
Accounts
Payable
Beginning
Balance
$14,800
$500
$10,000
$25,000
$300
T5.
+1,500
Ending
Balance
$16,300
Common
Stock
$50,000
+1,500
$500
$51,800
$10,000
$25,000
$300
$1,500
$50,000
$51,800
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60
T6. Revenues Earned Commission
with Deferred Receipt
Assets
Cash
Beginning
Balance
$16,300
T6.
Ending
Balance
Accounts
Receivable
Liabilities
Stockholders’ Equity
Supplies
Land
Building
Accounts
Payable
Retained
Earnings
Common
Stock
$500
$10,000
$25,000
$300
$1,500
$50,000
+$2,000
$16,300
$2,000
+2,000
$500
$53,800
$10,000
$25,000
$300
$3,500
$50,000
$53,800
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61
T7. Collection of Accounts
Receivable
Assets
Cash
Beginning
Balance
T7.
Ending
Balance
Accounts
Receivable
$16,300
$2,000
+1,000
-1,000
$17,300
$1,000
Supplies
$53,800
Stockholders’ Equity
Liabilities
Land
Building
Retained
Earnings
Accounts
Payable
Common
Stock
$500
$10,000
$25,000
$300
$3,500
$50,000
$500
$10,000
$25,000
$300
$3,500
$50,000
$53,800
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62
Expenses Incurred
T8. Paid Equipment Rental Expense
T9. Paid Wages Expense
Assets
Cash
Beginning
Balance
Accounts
Receivable
$17,300
Supplies
$1,000
Stockholders’ Equity
Liabilities
$500
Land
$10,000
Building
Retained
Earnings
Accounts
Payable
$25,000
$300
$3,500
T8.
-1,000
-1,000
T9.
-400
-400
Ending
Balance
$15,900
$1,000
$52,400
$500
$10,000
$25,000
$300
$2,100
Common
Stock
$50,000
$50,000
$52,400
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63
T10. Utility Expense Incurred
Current Liability Recorded
Assets
Cash
Beginning
Balance
$15,900
Accounts
Receivable
Supplies
$1,000
$500
Land
$10,000
Building
$15,900
$1,000
$500
$10,000
Retained
Earnings
Accounts
Payable
$25,000
T10.
Ending
Balance
Stockholders’ Equity
Liabilities
$25,000
$52,400
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$300
$2,100
+300
-300
$600
$1,800
Common
Stock
$50,000
$50,000
$52,400
64
T11. Owner’s Withdrawals
Assets
Cash
Beginning
Balance
T11.
Ending
Balance
Accounts
Receivable
$15,900
Supplies
$1,000
Stockholders’ Equity
Liabilities
$500
Land
$10,000
Building
Retained
Earnings
Accounts
Payable
$25,000
$600
-600
$15,300
$1,800
Common
Stock
$50,000
-600
$1,000
$500
$10,000
$25,000
$51,800
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$600
$1,200
$50,000
$51,800
65
Communication Through
Financial Statements
OBJECTIVE 6
Identify the four financial statements.
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66
The Importance of
Financial Statements
 Financial
statements are the primary
means of communicating important
accounting information to users.
 Financial statements represent models
of the business enterprise because they
show the business in financial terms.
 Financial statements are not perfect
pictures of the real thing.
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67
The Income Statement
 Summarizes
revenues earned and
expenses incurred over a period of
time.
 Is considered by many to be the
most important financial report
because it shows whether or not a
business achieved its profitability
goal.
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68
Shannon Realty, Inc.
Income Statement
For the Month Ended December 31, 20xx
Revenues
Commissions Earned
Expenses
Equipment Rental Expense
Wages Expense
Utilities Expense
Total Expenses
Net Income
$3,500
$1,000
400
300
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$1,700
$1,800
69
The Statement of Retained Earnings
• Shows the change in the owners’
capital over a period of time.
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70
Shannon Realty, Inc.
Statement of Retained Earnings
For the Month Ended December 31, 20xx
Retained Earnings, 12/1/xx
Net Income for the Month
Subtotal
Less Dividends
Retained Earnings, 12/31/xx
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$
0
1,800
$ 1,800
600
$ 1,200
71
The Balance Sheet
 Shows
financial position at a point in time.
 Is often called the statement of financial
position.
 Presents a view of the business as the
holder of resources, or assets, that are
equal to the claims against those assets.
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72
Shannon Realty, Inc.
Balance Sheet
December 31, 20xx
Assets
Cash
Accounts Receivable
Supplies
Land
Building
Total Assets
$15,300
1,000
500
10,000
25,000
$51,800
Liabilities
Accounts Payable
$600
Stockholders’ Equity
Common Stock
Retained Earnings
Total Stockholders’
Equity
Total Liabilities and
Stockholders’ Equity
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$50,000
1,200
51,200
$51,800
73
The Statement of Cash Flows
• Focuses on a company’s liquidity
goal.
• Shows cash produced and used by
operating a business and
important financing and investing
transactions that take place during
an accounting period.
• Is directly related to the other three
statements.
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74
Shannon Realty, Inc.
Statement of Cash Flows
For the Month Ended December 31, 20xx
Cash Flows from Operating Activities
Net Income
Noncash Expenses and Revenues
Included in Income
Increase in Accounts Receivable
Increase in Supplies
Increase in Accounts Payable
$1,800
$(1,000)
(500)
600
Net Cash Flows from
Operating Activities
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(900)
$900
75
Shannon Realty, Inc.
Statement of Cash Flows
For the Month Ended December 31, 20xx
(continued…)
Cash Flows from Investing Activities
Purchase of Land
($10,000)
Purchase of Building
(25,000)
Net Cash Flows from Investing
(35,000)
Activities
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76
Shannon Realty, Inc.
Statement of Cash Flows
For the Month Ended December 31, 20xx
(continued…)
Cash Flows from Financing Activities
Investments by Stockholders
Dividends
$50,000
(600)
Net Cash Flows from
Financing Activities
Net Increase (Decrease) in Cash
Cash at Beginning of Month
Cash at End of Month
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49,400
$15,300
0
$15,300
77
Discussion
Q. Why is the balance sheet sometimes called
the statement of financial position?
A. Financial position consists of the economic
resources that belong to a business and the
claims against those resources as of a
certain date. This is the information shown
on the balance sheet.
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78
Generally Accepted
Accounting Principles
OBJECTIVE 7
State the relationship of generally
accepted accounting principles
(GAAP) to financial statements and
the independent CPA’s report, and
identify the organizations that
influence GAAP.
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79
Generally Accepted
Accounting Principles (GAAP)
Focus
on understandability of
financial statements.
Encompass
the conventions,
rules, and procedures
necessary to define accepted
accounting practice at a
particular time.
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80
Financial Statements, GAAP, and
the Independent CPA’s Report
Financial
statements are prepared
by management and may be
biased.
Financial statements are audited
by independent CPAs.
An audit ascertains that the
financial statements have been
prepared in accordance with
GAAP.
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81
Organizations That Influence
Current Practice
FASB.
AICPA.
GASB.
IASC.
IRS.
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82
Discussion
Q.
What are GAAP?
A.
GAAP are generally accepted accounting
principles; they are the “conventions,
rules, and procedures necessary to define
accepted accounting practice at a
particular time.”
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83
Discussion
Q. Why are GAAP important to
readers of financial statements?
A. GAAP ensure that the financial
statements will be understandable,
consistent, and fairly presented to
their users.
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84
Professional Ethics and the
Accounting Profession
OBJECTIVE 8
Define ethics and describe the ethical
responsibilities of accountants.
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What Are Professional Ethics?


A code of conduct that applies to the
practice of a profession.
Codes of conduct adopted by the
AICPA and each state.
 Responsibility to the public.
 Integrity.
 Objectivity.
 Independence.
 Due care.
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The Institute of Management Accountants’ (IMA)
Code of Professional Conduct





Competency.
Confidentiality.
Integrity.
Avoidance of conflicts of interest.
Communication of information
objectively and without bias.
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Discussion
Q.
Discuss the importance of professional ethics
in the accounting profession.
A.
Professional ethics is a code of conduct that
applies to the practice of a profession. As
members of a profession, accountants have a
responsibility, not only to their employers
and clients but to society as a whole, to
uphold the highest ethical standards.
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OK, LET’S REVIEW . . .
1.
Define accounting, identify business goals
and activities, and describe the role of
accounting in making informed decisions.
2.
Identify the many users of accounting
information in society.
3.
Explain the importance of business
transactions, money measure, and separate
entity to accounting measurement.
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89
CONTINUING OUR REVIEW . . .
4. Describe the corporate form of business
organization.
5. Define financial position, state the
accounting equation, and show how
they are affected by simple
transactions.
6. Identify the four financial statements.
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90
AND FINALLY . . .
7. State the relationship of generally
accepted accounting principles (GAAP)
to financial statements and the
independent CPA’s report, and identify
the organizations that influence GAAP.
8. Define ethics and describe the ethical
responsibilities of accountants.
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