Chapter 1

Accounting and the Business Environment
Chapter 1
Copyright 2007 Prentice-Hall. All rights reserved
Objective 1
Use accounting vocabulary
Accounting
Measures Processes Communicates.. Financial information to decision makers
Decision Makers
Individuals Businesses Investors Creditors Taxing Authorities
Financial vs. Managerial Accounting

Financial Accounting Information for people outside of the company Managerial Accounting Information for internal decision makers
Governing Organizations
FASB Financial Accounting Standards Board SEC Securities and Exchange Commission AICPA American Institute of Certified Public Accountants IMA Institute of Management Accountants
Copyright 2007 Prentice-Hall. All rights reserved 6
Ethics
Audit
Examination of companys financial situation Performed by independent accountants
Sarbanes-Oxley Act
Criminal offense to falsify financial statements
Public Companies Accounting Oversight Board

Monitors work of accountants
Standards of Professional Conduct

AICPA Code of Professional Conduct for Accountants IMA Standards of Ethical Conduct
Types of Business Organizations

Proprietorships Partnerships Corporations Limited-liability partnership (LLP) and Limited-liability company (LLC)

Proprietorships
Has a single owner, Small retail stores or professional businesses, Owners book and business books are separate, Life is considered to be limited by the owners choice or death, Owner is personally liable.
10

Partnerships
Joins two or more individuals as co-owners Small-medium sized retail stores and professional organizations, Accounting books are kept separate from partners, Life is limited by owners choice or death, Partners are personally liable.
11

Corporations
Is a business owned by stockholders or shareholders- generally many owners Life of organization is consider to be indefinite, Stockholders are not personally liable.
12

Limited-Liability Partnerships (LLP)
Owners are members of partnership, Is one where a wayward partner cannot create a large liability for the other partner, Each partner is liable only for his or her own actions and those under his or her control. Life is indefinite, Members are not personally liable.
13

Limited-Liability Companies (LLC)
The business not the owner is liable for the companys debts. Life indefinite.
14
Objective 2
Apply accounting concepts and principles
15
GAAP
Generally Accepted Accounting Principles
Accounting guidelines that govern how accountants measure, process, and communicate financial information Formulated by Financial Accounting Standards Board (FASB)
16
GAAP
Primary objective of financial accounting provide information that is useful for making investment and lending decisions
17
Entity Concept
Accounting Entity organization that stands apart as a separate economic unit
18
Reliability (Objectivity) Principle

Accounting information is based on the most reliable data available
Verifiable Free from bias Individuals would arrive at similar conclusions using same data
19
Cost Principle
Acquired assets and services should be recorded at their actual cost (historical cost)
20
Going Concern Concept

Assumes that the entity will remain in operation for the foreseeable future
21
Stable-Monetary-Unit Concept
Assumes that the dollars purchasing power is stable
22
Objective 3
Use the accounting equation
23
Assets
Economic resources, expected to benefit the business in the future
Cash Accounts receivable Prepaid Insurance Merchandise inventory Furniture Land
Other Examples
Building Equipment
Truck Machines
Copyrights
24
Claims to the Assets

Liabilities economic obligations payable to an individual or organization outside the business
Accounts payable Notes payable Salary payable Unearned Revenue
25
Claims to the Assets

Owners Equity (capital) claim of business owner to the assets of the business
26
The Accounting Equation

= Liabilities + Owners Equity
Assets
Economic Resources
Claims to Economic Resources

Transactions that Affect Owners Equity

OWNERS EQUITY INCREASES OWNERS EQUITY DECREASES Owner Withdrawals Owners Equity
Owner Investments
Revenues
Expenses
28
Revenues
Amounts earned by delivering goods or services to customers
Sales revenue Service revenue Interest revenue Dividend revenue
29
Expenses
Decrease in owners equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers
Salary expense Rent expense Utilities expense Interest expense
30
Exercise 1-18
Assets Liabilities Owners Equity
Pep Boys Eddie Bauer Benbrook Exxon
$? $81,000 72,000 $72,000 100,000
$60,000 ? 32,000 79,000
$21,000 40,000 ? 21,000
31
Objective 4
Analyze business transactions
32
Transaction
An event that affects the financial position of a particular entity and can be recorded reliably
33
Transacciones
34
Thomas Ray Invested $10,000 in cash in law practice.

Yes
Are this all transactions?
Purchased office equipment on account $3,000.

Yes
Purchase supplies on account for 1,600.

Yes
Met with a possible client, who will pay him $1,200 for services rendered if contracted.
No
Provided legal services to client for cash $1,200.

Yes
Receive $250 bill from Daily New for ad that will be paid later.
Yes Provides $3,500 of programming services for customers receiving $1,500 in cash and the balance of $2,000 is billed on account. Yes No
Called an office supplies for information on cost of a desk, $1,000.

Paid monthly expenses: salaries $900, utilities $200, and rent expense $600.
Yes
Exercise 1-17
a. Increased assets (cash)
b. No effect on total assets

c. Decreased assets (cash)
d. Increased assets (equipment)
36
Exercise 1-17
e. Increased assets (accounts receivable)
f. Decreased assets (cash)

g. No effect on total assets
h. Increased assets (cash)
37
Exercise 1-22
Date
July Cash
Assets
Medical Supplies Land
Liabilities Owners Equity

Accounts Payable M.Lange, Capital Type of Transaction
45,000
45,000 Investment
Assets = $45,000
Liabilities & Owners Equity = $45,000
38
Exercise 1-22
Date
July Cash
Assets

6 9 Bal
45,000 -35,000 10,000 35,000 35,000
45,000 Investment 45,000

Assets = $45,000
39
Exercise 1-22
Date
July Cash
Assets

Bal
10,000
35,000
45,000
12
Bal
2,000
10,000 2,000 35,000
2,000
2,000 45,000
Assets = $47,000
40
Exercise 1-22
Date
July Cash
Assets

Bal
15-31
10,000 2,000 35,000 7,000 17,000 2,000 35,000
2,000 2,000
45,000 7,000 Revenue 52,000
Bal
Assets = $54,000
41
Exercise 1-22
Date
July Cash
Assets

Bal
17,000 2,000 35,000 -1,000
2,000
52,000 -1,700 Salaries Exp -1,000 Rent Exp - 300 Utilities Exp
15-31 -1,700
- 300 Bal 14,000 2,000 35,000

Assets = $51,000
2,000
49,000

42
Exercise 1-22
Date
July Cash
Assets

Bal
14,000 2,000 35,000 500 -500 14,500 1,500 35,000
2,000 2,000
49,000 49,000
28
Bal
Assets = $51,000
43
Exercise 1-22
Date
July Cash
Assets

Bal
14,500 1,500 35,000 -1,500 13,000 1,500 35,000

Assets = $49,500
2,000 -1,500 500
49,000 49,000
31
Bal
44
Objective 5
Prepare financial statements
Objective 6
Evaluate business performance
45
Financial Statements
Income statement Statement of owners equity Balance sheet Statement of cash flows
46
Income Statement
Summary of an entitys revenues, expenses, and net income or net loss for a specific period Revenues - Expenses Net Income: Revenues > Expenses Net Loss: Expenses > Revenues
47
Statement of Owners Equity

Summary of changes in an entitys owners equity during a specific period Beginning owners equity + Owners investments + Net income - Net loss - Owners withdrawals Ending owners equity
Balance Sheet
Reports the entitys assets, liabilities, and owners equity as of a specific date Assets = Liabilities + Owners Equity
49
Statement of Cash Flows

Reports cash receipts and cash payments during a period (covered in Chapter 17)
50
Maria Lange, M.D. Income Statement For the Month Ended July 31, 2006
Revenue: Fees earned Expenses: Salary expense Rent expense Utilities expense Total Expenses Net income $7,000 $1,700 1,000 300
3,000 $4,000
51
Maria Lange, M.D. Statement of Owners Equity For the Month Ended July 31, 2006
Maria Lange, capital, July 1, 2006 Add: Investment by owner Net income for the month Subtotal Less: Withdrawals by owner Maria Lange, capital, July 31, 2006 $ 0 45,000 4,000 $49,000 0 $49,000
52
Maria Lange, M.D. Balance Sheet July 31, 2006

Assets Cash Medical supplies Land Total assets Liabilities $13,000 Accounts payable 1,500 Owners equity, 35,000 M. Lange, capital
$500
49,000
Total liabilities and $ 49,500 owners equity $ 49,500
53
Exercise 1-24
Allen Samuel Road Service Balance Sheet November 30, 2009 Assets Cash Accounts receivable Supplies Equipment $2,000 6,000 500 15,500 Liabilities Accounts payable $3,500
Note payable
Total liabilities Owners Equity
5,000
$8,500
A. Samuel, capital
Total Assets $24,000
15,500
Total liabilities and owners equity $24,000

54
Exercise 1-26
Ciliotta Design Studio Income Statement Year Ended December 31, 2006 Service revenue Expenses: Salary expense Rent expense Utilities expense $60,000 24,000 6,800 $158,100
Supplies expense Property tax expense Total expenses Net income

4,000 1,200
96,000
$62,100
55
Exercise 1-26
2. Owners withdrawals: Ciliottas, capital, beginning of year Add: Net income Investment by owner Subtotal Less: Owner withdrawal Ciliotta, capital, end of year
$ 0 62,100 15,000 $77,100 ? 50,000 $27,100
56
End of Chapter 1
57

Chapter 1

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Chapter 1

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Accounting and the Business Environment

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Financial vs. Managerial Accounting

Copyright 2007 Prentice-Hall. All rights reserved

Public Companies Accounting Oversight Board

Standards of Professional Conduct

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Types of Business Organizations

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Reliability (Objectivity) Principle

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Going Concern Concept

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Claims to the Assets

Copyright 2007 Prentice-Hall. All rights reserved

Claims to the Assets

Copyright 2007 Prentice-Hall. All rights reserved

The Accounting Equation

Claims to Economic Resources

Transactions that Affect Owners Equity

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Pep Boys Eddie Bauer Benbrook Exxon

$? $81,000 72,000 $72,000 100,000

$60,000 ? 32,000 79,000

$21,000 40,000 ? 21,000

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Thomas Ray Invested $10,000 in cash in law practice.

Are this all transactions?

Purchased office equipment on account $3,000.

Purchase supplies on account for 1,600.

Provided legal services to client for cash $1,200.

Called an office supplies for information on cost of a desk, $1,000.

b. No effect on total assets

d. Increased assets (equipment)

Copyright 2007 Prentice-Hall. All rights reserved

f. Decreased assets (cash)

h. Increased assets (cash)

Copyright 2007 Prentice-Hall. All rights reserved