Financial Accounting Notes 2b

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PREPARED BY: AZHARRIND

IMSA

Chapter2I ntroduction to Accounting

and BusinessAccounting, 21st Edition

PREPARED BY: AZHAR RIND


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1. Describe the nature of a business.

2. Describe the role of accounting in business.

3. Describe the importance of business ethics and

the basic principles of proper ethical conduct.

4. Describe the profession of accounting.

5. Summarize the development of accounting

principles and relate them to practice.6. State the accounting equation and define each

element of the equation.

Object ives

After studying this

chapter, you should

be able to:


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7. Explain how business transactions can bestated in terms of the resulting change in the

basic elements of the accounting equation.

Object ives

8. Describe the financial statements of a

proprietorship and explain how they interrelate.

9. Use the ratio of liabilities to owners equity to

analyze the ability of a business to withstand

poor business conditions.


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Manufacturing Business

Product

General Motors Cars, trucks, vans

Intel Computer chips

Boeing Jet aircraft

Nike Athletic shoes and apparelCoca-Cola Beverages

Sony Stereos and television

Types of Businesses


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Merchandising Business

Product

Wal-Mart General merchandise

Toys R Us Toys

Circuit City Consumer electronics

Lands End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses


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Service Business

Product

Disney Entertainment

Delta Air Lines Transportation

Marriott Hotels Hospitality and lodging

Merrill Lynch Financial adviceSprint Telecommunication

Types of Businesses


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There are three types ofbusiness organizations

Proprietorship

Partnership

Corporation


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A proprietorship

is owned by one

individual.

Advantages Ease in organizing

Low cost of

organizing

Disadvantage

Limited source of

financial resources Unlimited liability

Joes


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A partnershipis

owned by two or

more individuals.

Advantages

More financialresources than a

proprietorship.

Additionalmanagement skills.

Disadvantage

Unlimited liability.

Joe and Martys


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A corporationis

organized under state

or federal statutes as a

separate legal entity.

Advantage

The ability to obtain

large amounts of

resources by issuing

stocks.

Disadvantage

Double taxation.

J & M, Inc.


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Business Strategies

Abusiness strategyis an integrated

set of plans and actions designed to

enable the business to gain anadvantage over its competitors, and

in doing so, to maximize its profits.


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Business Strategies

Under alow-cost strategy, a business

designs and produces products or

services of acceptable quality at a costlower than that of its competitors.

Wal-Mart

Southwest Airlines


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Business Strategies

Under adifferential strategy, a business

designs and produces products or services

that possess unique attributes orcharacteristics which customers are willing

to pay a premium price.

Maytag

Tommy Hilfiger


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Value Chain of a Business

A value chainis the way a

business adds value for its

customers by processing inputsinto product or service.

Inputs

Business

Processes

Products or

Services

Customer

Value


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A business stakeholderis a person or

entity having an interest in theeconomic performance of the business.

Business Stakeholders


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2Assessstakeholders

informational

needs.

The Process of

Providing Information

STAKEHOLDERSInternal:

Owners,

managers,employees

External:

Customers,

creditors,government1

Identify

stake-

holders.


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AccountingInformation

System

Design the

accounting

information

system to meet

stakeholders

needs.

34

Record

economicdata about

business

activities

and events.

The Process of



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5

Prepare

accounting

reports forstakeholders.

STAKEHOLDERSInternal:

Owners,

managers,

employees

External:

Customers,

creditors,

government

Accounting

Information

System

The Process of



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Business Ethics

1. Avoid small ethical lapses.

2. Focus on your long-term

reputation.3. You may expect to suffer

adverse personal

consequences for holding

to an ethical position.

Sound

Principles thatform the

foundation for

ethical

behavior


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Profession of Accounting

Accountants employed by a business firm or

a not-for-profit organization are said to be

engaged in private accounting.

Accountants and their staff who provide

services on a fee basis are said to beemployed in public accounting.


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Generally Accepted

Accounting

Principles (GAAP)


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The business entity concept

limits the economic data inthe accounting system to

data related directly to the

activities of the business.The cost conceptis the

basis for entering the

exchange price, or costof an acquisition in the

accounting records.


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The objectivity concept

requires that the accounting

records and reports be based

upon objective evidence.The unit-of-measure

conceptrequires that

economic data berecorded in dollars.


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The Accounting Equation

Assets = Liabilities + Owners Equity

The resources

owned by a

business


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The rights of the

creditors, which

represent debtsof the business


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The rights of the

owners


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What is a business

transaction?

Abusiness transaction is an economic event orcondition that directly changes an entitys financial

condition or directly affects its results of operations.


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On November 1,

2005, Chris

Clark begins abusiness that will

be known as

NetSolutions.


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a. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions.

Chris Clark, Capital25,000 Investment

by Chris

Clark

Cash

25,000a.

Assets Owners Equity=

=


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b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital

25,000Cash + Land

25,000Bal.

Assets Owners Equity=

=b. 20,000 +20,000

Bal. 5,000 20,000 25,000


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Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay the

supplier in the near future (on account).

Owners

Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=


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d. NetSolutions provided services to

customers, earning fees of $7,500 and

received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500

d. + 7,500 + 7,500


AssetsOwners

Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees

earned

=

=


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e. 3,650 2,125

800

450

275

Wages

Rent

Util.

Misc.


Assets

e. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.

Owners


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal.8,850 1,350 20,000 1,350 28,850


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Assets

f. NetSolutions paid $950 to

creditors during the month.

Owners


Bal. 8,850 1,350 20,000 1,350 28,850

f. 950 950

=

Bal. 7,900 1,350 20,000 400 28,850


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Assets

g. At the end of the month, the cost

of supplies on hand is $550, so

$800 of supplies were used.

Owners


Bal. 7,900 1,350 20,000 400 28,850

g. 800 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies

expense


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Assets

h. At the end of the month, Chris

withdrew $2,000 in cash from the

business for personal use.

Owners

Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050

h. 2,000 2,000

Bal. 5,900 550 20,000 400 26,050

With-

drawal

=

=


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Owners

withdrawals

Expenses

Decreased by

Owners Equity

Effects of Transactions on Owners Equity

Increased by

Owners

investments

Revenues

Net

income


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Accounting reports, called

f inancial statements,

provide summarizedinformation to the owner.


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Financial Statements

Income statementA summary of the revenueand expenses for a specific period of time.

Statement of owners equityA summary of

the changes in the owners equity that have

occurred during a specific period of time.

Balance sheetA list of the assets, liabilities,

and owners equity as of a specific date.

Statement of cash flowsA summary of the

cash receipts and disbursements for a specific

period of time.

NetSolutions


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Fees earned $7 500 00Operating expenses:

Rent expense

$2 125 00Wages expense

800 00

Supplies expense

450 00Utilities expense

275 00Miscellaneous expense

Total operating expenses 1 135 00

NetSolutions

Income Statement

For the Month Ended November 30, 2005

800 00

Net income $3 050 00To the statement

of owners equity


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Chris Clark, capital, November 1, 2005 $ 0

NetSolutions

Statement of Owners Equity

For the Month Ended November 30, 2005Investment on November 1 $25 000 00

Net income for November 3 050 00

$28 050 00Less withdrawals 2 000 00

Increase in owners equity 26 050 00

Chris Clark, capital, November 30, 2005 $26 050 00

From the income

statement

To the

balance sheet


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Assets Liabilities

NetSolutions

Balance Sheet

November 30, 2005Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Owners Equity

Land 20 000 00 Chris Clark, cap. 26 050 00

Total liabilities and

Total assets $26 450 00 owners equity $26 450 00

From the

statement ofowners equity

This balance sheet presentedusing the accountform


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When the balance sheet displays

the liabilities and owners equitybelow the assets, the reportformis

being used.

N S l i


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Cash flows from operating activities:Cash received from customers $ 7 500 00

Deduct cash payments for expenses

and payments to creditors 4 600 00

Net cash flow from operating activities 2 900 00Cash flows from investing activities:

Cash payment for acquisition of land (20 000 00

Cash flows from financing activities:

Cash received as owners investment $25 000 00Deduct cash withdrawal by owner 2 000 00

Net cash flow from financing activities 23 000 00

Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00

NetSolutions

Statement of Cash Flows

For the Month Ended November 30, 2005

Should match Cash on the balance sheet

)


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Statement of Cash Flows

Cash F lows from Operating Activities

This section

reports a summary of cash receipts and cash payments

from operations.

Cash F lows from Investing Activities

This sectionreports the cash transactions for the acquisition and sale

of relatively permanent assets.

Cash F lows from F inancing Activities

This sectionreports the cash transactions related to cash

investments by the owner, borrowings, and cash

withdrawals by the owner.


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Ratio of liabilitiesto owners equity

= Total LiabilitiesTotal owners equity (or total

stockholders equity)

The ratio of liabilities to owners equity

allows owners like Chris Clark to analyze

the firms ability to withstand poor

business conditions.

Tools for Financial

Analysis and Interpretation


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Ratio of

liabilities to

owners equity

=$400

$26,050

Tools for Financial

Analysis and Interpretation

= 0.015Ratio of

liabilities to

owners equity


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The End

Chapter 2

Documents

Financial Accounting Notes 2b