Introduction to Accounting and Business
Chapter 1
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
1. Describe the nature of a business, the role of
accounting, and ethics in business.
2. Summarize the development of accounting
principles and relate them to practice.
3. State the accounting equation and define each
element of the equation.
4. Describe and illustrate how business transactions
can be recorded in terms of the resulting change
in the elements of the accounting equation.
5. Describe the financial statements of a corporation
and explain how they interrelate.
6. Describe and illustrate the use of the ratio of
liabilities to stockholders’ equity in evaluating a
company’s financial condition.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1
Describe the nature of
a business, the role of
accounting, and
ethics in business.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Nature of Business and Accounting
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Nature of Business and Accounting
 The objective of most businesses is to earn
a profit.
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Types of Businesses
Service:
Provide services rather than products
Merchandising:
Sell products they purchase from other businesses to
customers
Manufacturing:
Change basic inputs into products that are sold to customers
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Types of Businesses
Service Businesses
Service
Delta Air Lines
Transportation services
The Walt Disney Company
Entertainment services
Merchandising Businesses
Product
Walmart
General merchandise
Amazon.com
Internet books, music, videos
Manufacturing Businesses
Product
Ford Motor Company
Cars, trucks, vans
Dell
Personal computers
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
The Role of Accounting in Business
 Accounting can be defined as an information
system that provides reports to users about
the economic activities and condition of a
business.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
The Role of Accounting in Business
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
The Role of Accounting in Business
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Managerial Accounting
 The area of accounting that provides
internal users with information is called
managerial accounting or management
accounting.
 Managerial accountants employed by a
business are employed in private
accounting.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Financial Accounting
 The area of accounting that provides
external users with information is called
financial accounting.
 The objective of financial accounting is to
provide relevant and timely information for
the decision-making needs of users outside
of the business.
 General-purpose financial statements are
one type of financial accounting report that
is distributed to external users.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
 The objective of accounting is to provide
relevant, timely information for user
decision making.
 Accountants must behave in an ethical
manner so that the information they provide
users will be trustworthy and, thus, useful for
decision making.
 Ethics are moral principles that guide the
conduct of individuals.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
(concluded)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
 The answer to “What
went wrong for these
companies?” involves
one or both of these
factors. (Exhibit 2)
 Failure of
individual
character
 Firm culture of
greed and ethical
indifference
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Role of Ethics in Accounting and Business
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Institute of Management Accountants
Standards of Ethical Conduct
1.
Maintain an appropriate level of professional
competence.
2.
Refrain from disclosing confidential information.
3.
Avoid conflicts of interest.
4.
Communicate information fairly and objectively.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
American Institute of Certified Public Accountants
Codes of Professional Conduct
1.
2.
3.
4.
5.
6.
Exercise sensitive professional and moral judgment.
Act in a way that will serve the public interest, honor
the public trust, and demonstrate commitment to
professionalism.
Perform all professional responsibilities with the
highest sense of integrity.
Maintain objectivity and be free of conflicts of interest.
Observe the profession's technical and ethical
standards and continually improve competency and
quality of services.
Use ethical standards when determining the scope and
nature of services to be provided.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ETHICS CASE
Lauren Smith is the controller for Sports Central, a chain of
sporting goods stores. She has been asked to recommend a
site for a new store. Lauren has an uncle who owns a
shopping plaza in the area of town where the new store is to
be located, so she decides to contact her uncle about leasing
space in his plaza. Lauren also contacted several other
shopping plazas and malls, but her uncle's store turned out
to be the most economical place to lease. Therefore, Lauren
recommended locating the new store in her uncle's shopping
plaza. In making her recommendation to management, she
did not disclose that her uncle owned the shopping plaza.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ETHICS CASE
Tom Brown, the controller for MicroTech Software Company,
is responsible for preparing the company's financial
statements. He learns that sales for the first quarter of the
year have dropped so dramatically that the company is in
danger of bankruptcy. As a result, he applies for an
accounting position with another software company that
competes with MicroTech. During his job interview, Tom is
asked why he wants to leave MicroTech. He replies truthfully,
"The company's sales are down another 10% this quarter. I
fear they will go out of business." At that time, MicroTech had
not released its sales results to the public.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Opportunities for Accountants
 Accountants and their staffs who provide
services on a fee basis are said to be
employed in public accounting.
 Accountants employed by a business firm
or a not-for-profit organization are said to
be employed in private accounting.
 Public accountants who have met a state’s
education, experience, and examination
requirements may become Certified Public
Accountants (CPAs).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Opportunities for Accountants
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SPECIALIZED FIELDS IN ACCOUNTING
Financial Accounting: Preparing reports that show the
profits and financial health of the company using the rules
of accounting, known as generally accepted accounting
principles (GAAP)
Auditing: Evaluating financial records and reports to
determine whether they present the results of a company's
operations fairly
Management Accounting: Providing data to management to
assist in running day-to-day operations
Cost Accounting: Tracking costs, particularly those to
manufacture a product
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SPECIALIZED FIELDS IN ACCOUNTING
Tax Accounting: Preparing tax returns and helping
companies and individuals reduce the amount of taxes paid
by carefully planning their business activities
Accounting Systems: Designing accounting systems that
collect accurate data and protect a company's assets (cash,
inventory, etc.) from misuse or theft; since most accounting
systems today are maintained on a computer, this area
requires computer hardware and software knowledge
International Accounting: Focusing on issues related to
international trade; for example, buying or selling goods in a
foreign currency
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SPECIALIZED FIELDS IN ACCOUNTING
Not-for-Profit Accounting: Reporting on the operations of
nonprofit organizations (such as churches,
charities,educational institutions, and governmental
agencies)
Social Accounting: Measuring the social costs and benefits
of various actions
Accounting Instruction: Teaching accounting to students
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2
Summarize the
development of
accounting principles
and relate them to
practice.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Generally Accepted Accounting Principles
 Financial accountants follow generally
accepted accounting principles (GAAP) in
preparing reports.
 Within the U.S., the Financial Accounting
Standards Board (FASB) has the primary
responsibility for developing accounting
principles.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Generally Accepted Accounting Principles
 The Securities 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.
 Many countries outside the United States
use generally accepted accounting
principles adopted by the International
Accounting Standards Board (IASB).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Business Entity Concept
 Under the business entity concept, the
activities of a business are recorded
separately from the activities of its owners,
creditors, or other businesses.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Business Entity Concept
Sally Vertrees purchased a personal
computer for use at home. Sally owns a
dental practice. She occasionally uses the
computer for a task related to her dental
practice; however, the computer is used
primarily by Sally's children. Can the
computer be recorded as an asset in the
accounting records of Sally's dental office?
Why or why not?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Proprietorship
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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Partnership
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Corporation
 A corporation is
organized under
state or federal
statutes as a
separate legal
taxable entity.
 Corporations generate
90% of business
revenues.
 20% of the business
organizations in the U.S.
are corporations.
 Ownership is divided
into shares, called
stock.
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Corporation
 A corporation is
organized under
state or federal
statutes as a
separate legal
taxable entity.
 Can obtain large
amounts of resources
by issuing stocks.
 Used by large
businesses.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Limited Liability Company (LLC)
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost Concept
 Under the cost concept, amounts are
initially recorded in the accounting records
at their cost or purchase price.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost Concept
Aaron Publishers purchased a building on
February 20, 2010, for $150,000. Other amounts
related to this purchased are shown on the
next slide.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost Concept
 Price listed by seller on January 1,
2010
 Aaron Publishers’ initial offer to buy
on January 31, 2010
 Purchase price on February 20, 2010
 Estimated selling price on December
31, 2012
 Assessed value for property taxes,
December 31, 2012
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$160,000
140,000
150,000
220,000
190,000
LO 2
Objectivity Concept
 The objectivity concept requires that the
amounts recorded in the accounting
records be based on objective evidence.
 Only the final agreed-upon amount is
objective enough to be recorded in the
accounting records.
 So the correct answer is $150,000
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Objectivity Concept
Jason Thompson purchased an office building
10 years ago for $780,000. The building was
just appraised at $1.25 million. What value
should be used for the building in Jason's
accounting records?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Unit of Measure Concept
 The unit of measure concept requires that
economic data be recorded in dollars.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-1
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
State the accounting
equation and define
each element of the
equation.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
The Accounting Equation
 The resources owned by a business are its
assets.
 The rights of creditors are the debts of the
business and are called liabilities.
 The rights of the owners are called owner’s
equity.
 The equation Assets = Liabilities + Owner’s
Equity is called the accounting equation.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of
creditors are the
debts of the
business
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the
owners
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-2
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4
Describe and illustrate how
business transactions can be
recorded in terms of the
resulting change in the
elements of the accounting
equation.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Business Transaction
 A business transaction is an economic
event or condition that directly changes an
entity’s financial condition or its results of
operations.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EVENTS/CONDITIONS RECORDED IN
ACCOUNTING RECORDS
1.
2.
3.
4.
5.
6.
Receipt of cash
Payment of cash
Events that create a legal obligation to pay out cash
(or other assets) in the future
Events that obligate another party to pay you cash
(or other assets) in the future
Sale of a product or completion of a service for a
customer––this is known as earning revenue
The use of products or services in running your
business––this is known as incurring an expense
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction A
On November 1, 2011, Chris Clark deposited
$25,000 in a bank account in the name of
NetSolutions in return for shares of stock in the
corporation.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Transaction A
 Stock issued to owners (stockholders), such
as Chris Clark, is referred to as capital
stock. The owner’s equity in a corporation is
called stockholders’ equity.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction B
On November 5, 2011, NetSolutions paid
$20,000 for the purchase of land as a future
building site.
The new amounts are called balances.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction C
On November 10, 2011, NetSolutions purchased
supplies for $1,350 and agreed to pay the supplier
in the near future.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction C
 The liability created by a purchase on
account is called an account payable.
 Items such as supplies that will be used in
the business in the future are called prepaid
expenses, which are assets.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction D
On November 18, 2011, NetSolutions received cash
of $7,500 for providing services to customers. A
business earns money by selling goods or services
to its customers. This amount is called revenue.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction D
 Revenue from providing services is
recorded as fees earned.
 Revenue from the sale of merchandise is
record as sales.
 Other examples of revenue include rent,
which is recorded as rent revenue, and
interest, which is recorded as interest
revenue.
 An account receivable is a claim against a
customer, which is an asset.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction E
During the month, NetSolutions spent cash or
used up other assets in earning revenue. Assets
used in this process of earning revenue are called
expenses.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction E
On November 30, 2011, NetSolutions paid the
following expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction F
On November 30, 2011, NetSolutions paid
creditors on account, $950.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction G
On November 30, 2011, Chris Clark determined
that the cost of supplies on hand at the end of
the period was $550; therefore, the amount of
supplies used amounted to $800 ($1,350 –
$550 = $800).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Transaction H
On November 30, 2011, NetSolutions paid $2,000
to stockholders as dividends.
Dividends are distributions
of earnings to stockholders.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Summary
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
You Should Note the Following:
 The effect of every transactions is an
increase or a decrease in one or more of
the accounting equation elements.
 The two sides of the accounting equations
are always equal.
 The stockholders’ equity (owner’s equity) is
increased by amounts invested by
stockholders (capital stock).
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
You Should Note the Following:
 The stockholders’ equity (owner’s equity) is
increased by revenue and decreased by
expenses.
 The stockholders’ equity (owner’s equity) is
decreased by dividends paid to
stockholders.
 Retained earnings is the stockholders’
equity created from business operations
through revenue and expense transactions.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Types of Transactions Affecting Stockholders’ Equity
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 5
Describe the financial
statements of a corporation
and explain how they
interrelate.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Financial Statements
 After transactions have been recorded and
summarized, reports are prepared for users.
The accounting reports providing this
information are called financial statements.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Financial Statements
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Income Statement
 The income statement reports the revenues
and expenses for a period of time, based
on the matching concept.
 The matching concept is applied by
“matching” the expenses incurred during a
period with the revenue that those
expenses generated.
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-4
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Retained Earnings Statement
 The retained earnings statement reports the
changes in the retained earnings for a
period of time.
 It is prepared after the income statement
because the net income or net loss for the
period must be reported in this statement.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Retained Earnings Statement
To illustrate, assume that NetSolutions earned net
income of $4,155 and paid dividends of $2,000 during
December. The following statement would be
prepared.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-5
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Income Statement
Net income is carried to
the retained earnings
statement
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Retained Earnings Statement
From the income statement
To the balance sheet
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Balance Sheet
 A balance sheet is a list of the assets,
liabilities, and stockholders’ equity as of a
specific date.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Account Form
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Balance Sheet
This amount is
compared to the net
cash flow on the
statement of cash flows.
From the retained
earnings statement
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Statement of Cash Flows
 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
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Statement of Cash Flows
This amount should match
Cash on the balance sheet.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Cash Flows from Operating Activities
 The cash flows from operating activities
section reports a summary of cash receipts
and cash payments from operations.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Cash Flows from Investing Activities
 The cash flows from investing activities
section reports the cash transactions for the
acquisition and sale of relatively permanent
assets.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Cash Flows from Financing Activities
 The cash flows from financing activities
section reports the cash transactions
related to cash investments by the owner,
borrowings, and withdrawals by the owner.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-7
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-7
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
 Income Statement and
Retained Earnings
Statement
 Net income or net loss
reported on the
income statement is
also reported on the
retained earnings
statement as either an
addition (net income)
to or deduction (net
loss) from the
beginning retained
earnings.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
In Exhibit 6, NetSolutions’ net income of
$3,050 for November is added to the
beginning retained earnings on November 1,
2011, in the retained earnings statement.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
 Retained Earnings
Statement and and
Balance Sheet
 Retained earnings at
the end of the period
reported on the
retained earnings
statement is also
reported on the
balance sheet as
retained earnings.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
In Exhibit 6, NetSolutions’ retained
earnings of $1,050 as of November 30,
2011, on the retained earnings statement
also appears on the November 30, 20l1,
balance sheet as retained earnings.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
 Balance Sheet and
Statement of Cash
Flows
 The cash reported on
the balance sheet is
also reported as the
end-of-period cash
on the statement of
cash flows.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Interrelationships Among Financial Statements
In Exhibit 6, cash of $5,900 reported on the
balance sheet as of November 30, 2011, is
also reported on the November statement
of cash flows as the end-of-period cash.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 6
Describe and illustrate
the use of the ratio of
liabilities to stockholders’
equity in evaluating a
company’s financial
condition.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 6
Ratio of Liabilities to Stockholders’ Equity
Ratio of Liabilities
to Stockholders’
Equity
Ratio of Liabilities
to Stockholders’
Equity
=
=
Total Liabilities
Total Stockholders’ Equity
$400
$26,050
= 0.015
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 1-8
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Introduction to Accounting and Business
The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.