Copyright © by Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson

Copyright © by Houghton Mifflin Company. All rights reserved. 1

Financial & Managerial Financial & Managerial Accounting 2002eAccounting 2002e

Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSusan CrossonSusan Crosson

- - - - - - - - - - -Multimedia Slides by:

Harry Hooper Santa Fe Community College


Chapter 1Chapter 1Uses of Accounting Uses of Accounting

Information andInformation andthe Financial the Financial StatementsStatements


LEARNING OBJECTIVESLEARNING 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.


LEARNING OBJECTIVESLEARNING OBJECTIVES (continued)(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.


Accounting as an Information SystemAccounting as an Information System

OBJECTIVE 1

Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions.


• 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.


• 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.


• 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.


Data about business activities are the input to the accounting system.

Useful information for decision makers is the output.


Accounting as an Information SystemAccounting as an Information System


Business Goals, Activities, andBusiness Goals, Activities, and Performance MeasuresPerformance 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.


Business GoalsBusiness Goals

ProfitabilityA 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.

LiquidityA business must have enough cash available to pay debts when they are due.


Business Goals and ActivitiesBusiness Goals and 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.

Business ActivitiesBusiness Activities


Business Activities Business Activities (continued)(continued)

• Operating Activities.• Selling goods and services to customers.

• Employing managers and workers.

• Buying and producing goods and services.

• Paying taxes.


Indicate whether managers are achieving their business goals and if they are managing business activities well.

Performance MeasuresPerformance Measures


Performance measures must align with business goals:

Performance MeasuresPerformance Measures

Performance Measure Goal

Earned income. Profitability.

Cash flow. Liquidity.

Ratio of expenses to revenues. Operating performance level.

Ratio of money owed to total resources controlled.

Financing performance level.

Managers should understand and be motivated by these measures.


Financial and Management AccountingFinancial 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.


Management AccountingManagement 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.


Financial AccountingFinancial 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.


Processing Accounting Processing Accounting InformationInformation

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.


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.


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.

Discussion Discussion


Decision Makers: The Users of Decision Makers: The Users of Accounting InformationAccounting Information

OBJECTIVE 2

Identify the many users of accounting information in society.


Decision MakersDecision 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 profit-oriented ventures as well as government and not-for-profit organizations.


The Users of Accounting InformationThe Users of Accounting Information


ManagementManagement

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.


• Investors - owners

• Creditors – lenders.

Users withUsers witha Direct Financial Interesta Direct Financial Interest


• Tax Authorities.• Regulatory Agencies.• Labor Unions.• Investment Advisors.• The Financial Media.• Customers and

Consumer Groups.• Economic Planners.

Users with an Indirect Financial InterestUsers with an Indirect Financial Interest


Discussion 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.


Accounting MeasurementAccounting Measurement

OBJECTIVE 3Explain the importance of businesstransactions, money measure, andseparate entity to accountingmeasurement.


Four Basic QuestionsFour 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?


• 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.

What Is Measured?What Is Measured?


• 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.


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. Partnership2. U.S. dollar3. Payment of an

expense4. Corporation5. Sale of an asset



1. Partnership: (b)

2. U.S. dollar: (c)

3. Payment of an expense: (a)

4. Corporation: (b)

5. Sale of an asset: (a)

KEY

(a) business transaction (b) separate entity (c) money measure

A.A.


OBJECTIVE 4

Describe the corporate form of business organization.

The Corporation as a Separate The Corporation as a Separate EntityEntity


Forms of Business OrganizationForms of Business Organization

• Sole Proprietorship.

• Partnership.

• Corporation.


Sole ProprietorshipsSole 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.


PartnershipsPartnerships

• 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.


CorporationsCorporations

• One or more owners (stockholders.)• Legally separate entity from owners.• Owners can be separate from managers.• Limited liability.• Unlimited life.


Number and Receipts of U.S. Proprietorships, Number and Receipts of U.S. Proprietorships, Partnerships, and Corporations, 1997Partnerships, and Corporations, 1997


The Corporate Form of BusinessThe Corporate Form of Business


Organization of a CorporationOrganization 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.


Discussion 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.


Financial Position and the Financial Position and the Accounting EquationAccounting Equation

OBJECTIVE 5

Define financial position,

state the accounting equation, and

show how they are affected by

simple transactions.


Financial PositionFinancial Position

Economic Resources

= Equities.

= Creditors’ Equities + Owners’ Equity.

Assets = Liabilities + Owners’ Equity.

The Accounting Equation


Assets are economic resources owned by a business that are expected to benefit future operations.

• Monetary items.• Nonmonetary physical items.• Nonphysical items.

AssetsAssets


LiabilitiesLiabilities

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.


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.

Owners’ EquityOwners’ Equity


Contributed CapitalContributed Capital

• The amount invested in the business by stockholders

• Typically, it comprises par value stock and additional paid-in-capital


Retained Earnings• Equity generated from the income-

producing 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.


Three Types of Transactions That Three Types of Transactions That Affect Retained EarningsAffect Retained Earnings


Net Income / LossNet Income / Loss

Revenues > Expenses

Revenues < Expenses

Net Income

Net Loss


Some Illustrative Some Illustrative TransactionsTransactions


T1. Owners’ InvestmentsT1. Owners’ Investments

$50,000$50,000Ending Balance

$50,000$50,000

+$50,000+$50,000T1.

$0$0Beginning Balance

Common StockCash

Stockholders’ EquityLiabilitiesAssets


T2. Purchase of Assets with CashT2. Purchase of Assets with Cash

$50,000$25,000$10,000$15,000Ending Balance

$50,000$50,000

+$25,000+$10,000-35,000T2.

$50,000$50,000Beginning Balance

Common StockBuildingLandCash

Stockholders’

EquityLiabilitiesAssets


T3. Purchase of Assets byT3. Purchase of Assets byIncurring a LiabilityIncurring a Liability

$50,000$500$25,000$10,000$500$15,000Ending Balance

$50,500$50,500

+$500+$500T3.

$50,000$25,000$10,000$15,000Beginning Balance

Common Stock

Accounts PayableBuildingLandSuppliesCash



T4. Payment of a Liability T4. Payment of a Liability

$50,000$300$25,000$10,000$500$14,800Ending Balance

$50,300$50,300

-200-200T4.

$50,000$500$25,000$10,000$500$15,000Beginning Balance

Common Stock

Accounts PayableBuildingLandSuppliesCash



T5. Revenues Earned T5. Revenues Earned Commission Received in CashCommission Received in Cash

Assets Liabilities Stockholders’ Equity

Cash Supplies Land Building Accounts Payable

Retained Earnings

Common Stock

Beginning Balance

$14,800 $500 $10,000 $25,000 $300 $50,000

T5. +1,500 +1,500

Ending Balance

$16,300 $500 $10,000 $25,000 $300 $1,500 $50,000

$51,800 $51,800


T6. Revenues Earned Commission T6. Revenues Earned Commission with Deferred Receiptwith Deferred Receipt


Cash Accounts Receivable

Supplies Land Building Accounts Payable

Retained Earnings

Common Stock

Beginning Balance

$16,300 $500 $10,000 $25,000 $300 $1,500 $50,000

T6. +$2,000 +2,000

Ending Balance

$16,300 $2,000 $500 $10,000 $25,000 $300 $3,500 $50,000

$53,800 $53,800


T7. Collection of Accounts T7. Collection of Accounts ReceivableReceivable




Retained Earnings

Common Stock

Beginning Balance

$16,300 $2,000 $500 $10,000 $25,000 $300 $3,500 $50,000

T7. +1,000 -1,000

Ending Balance

$17,300 $1,000 $500 $10,000 $25,000 $300 $3,500 $50,000

$53,800 $53,800


Expenses IncurredExpenses IncurredT8. Paid Equipment Rental Expense T8. Paid Equipment Rental Expense

T9. Paid Wages ExpenseT9. Paid Wages Expense




Retained Earnings

Common Stock

Beginning Balance

$17,300 $1,000 $500 $10,000 $25,000 $300 $3,500 $50,000

T8. -1,000 -1,000

T9. -400 -400

Ending Balance

$15,900 $1,000 $500 $10,000 $25,000 $300 $2,100 $50,000

$52,400 $52,400


T10. Utility Expense Incurred T10. Utility Expense Incurred Current Liability RecordedCurrent Liability Recorded




Retained Earnings

Common Stock

Beginning Balance

$15,900 $1,000 $500 $10,000 $25,000 $300 $2,100 $50,000

T10. +300 -300

Ending Balance

$15,900 $1,000 $500 $10,000 $25,000 $600 $1,800 $50,000

$52,400 $52,400


T11. Owner’s WithdrawalsT11. Owner’s Withdrawals




Retained Earnings

Common Stock

Beginning Balance

$15,900 $1,000 $500 $10,000 $25,000 $600 $1,800 $50,000

T11. -600 -600

Ending Balance

$15,300 $1,000 $500 $10,000 $25,000 $600 $1,200 $50,000

$51,800 $51,800


Communication Through Communication Through Financial StatementsFinancial Statements

OBJECTIVE 6

Identify the four financial statements.


The Importance ofThe Importance ofFinancial StatementsFinancial StatementsThe Importance ofThe Importance of

Financial StatementsFinancial 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.


The Income StatementThe Income StatementThe Income StatementThe 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.


Shannon Realty, Inc. Shannon Realty, Inc. Income StatementIncome Statement

For the Month Ended December 31, 20xxFor the Month Ended December 31, 20xx

Revenues Commissions Earned $3,500

Expenses Equipment Rental Expense $1,000 Wages Expense 400 Utilities Expense 300 Total Expenses $1,700Net Income $1,800


The Statement of Retained EarningsThe Statement of Retained EarningsThe Statement of Retained EarningsThe Statement of Retained Earnings

• Shows the change in the owners’ capital over a period of time.


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Retained EarningsStatement of Retained Earnings


Retained Earnings, 12/1/xx

$ 0

Net Income for the Month 1,800 Subtotal $ 1,800 Less Dividends 600 Retained Earnings, 12/31/xx $ 1,200


The Balance SheetThe Balance SheetThe Balance SheetThe 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.


Shannon Realty, Inc.Shannon Realty, Inc.Balance SheetBalance Sheet

December 31, 20xxDecember 31, 20xx

AssetsCash $15,300

Accounts Receivable 1,000

Supplies 500

Land 10,000

Building 25,000

Total Assets $51,800

LiabilitiesAccounts Payable $600

Stockholders’ EquityCommon Stock $50,000

Retained Earnings 1,200

Total Stockholders’ 51,200

Equity

Total Liabilities and $51,800

Stockholders’ Equity


The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe 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.


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Cash FlowsStatement of Cash Flows


Cash Flows from Operating Activities

Net Income $1,800Noncash Expenses and Revenues Included in Income Increase in Accounts Receivable $(1,000) Increase in Supplies (500) Increase in Accounts Payable 600 (900)

Net Cash Flows fromOperating Activities $900


Shannon Realty, Inc.Shannon Realty, Inc.Statement of Cash FlowsStatement of Cash Flows

For the Month Ended December 31, 20xxFor the Month Ended December 31, 20xx(continued…)(continued…)

Purchase of Land ($10,000) Purchase of Building (25,000) Net Cash Flows from Investing

Activities (35,000)

Cash Flows from Investing Activities


Shannon Realty, Inc. Shannon Realty, Inc. Statement of Cash FlowsStatement of Cash Flows

For the Month Ended December 31, 20xxFor the Month Ended December 31, 20xx(continued…)(continued…)

Cash Flows from Financing Activities Investments by Stockholders $50,000

Dividends (600) Net Cash Flows from

Financing Activities 49,400

Net Increase (Decrease) in Cash $15,300 Cash at Beginning of Month 0

Cash at End of Month $15,300


Discussion 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.


Generally Accepted Generally Accepted Accounting Principles Accounting Principles

OBJECTIVE 7State the relationship of generallyaccepted accounting principles(GAAP) to financial statements andthe independent CPA’s report, andidentify the organizations thatinfluence GAAP.


Focus on understandability of financial statements.

Encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Generally Accepted Generally Accepted Accounting Principles (GAAP)Accounting Principles (GAAP)


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.

Financial Statements, GAAP, andFinancial Statements, GAAP, andthe Independent CPA’s Reportthe Independent CPA’s Report


FASB. AICPA. GASB. IASC. IRS.

Organizations That InfluenceOrganizations That InfluenceCurrent PracticeCurrent Practice



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.”



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.


Professional Ethics and the Professional Ethics and the Accounting ProfessionAccounting Profession

OBJECTIVE 8

Define ethics and describe the ethical

responsibilities of accountants.


What Are Professional Ethics?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.


The Institute of Management Accountants’ The Institute of Management Accountants’ (IMA) Code of Professional Conduct(IMA) Code of Professional Conduct

Competency. Confidentiality. Integrity. Avoidance of conflicts of

interest. Communication of information

objectively and without bias.



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.


OK, LET’S REVIEW . . .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.


CONTINUING OUR REVIEWCONTINUING 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.


AND FINALLY . . .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.

Documents

Copyright © by Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson