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Introduction to Accounting and Business. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen. Like right now. Objectives. 1. Describe the nature of a business. - PowerPoint PPT Presentation
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Introduction to Accounting Introduction to Accounting and Businessand Business
Like right now.Like right now.
Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand
corner of the screen. You can point and click anywhere on the screen.
Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand
corner of the screen. You can point and click anywhere on the screen.
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.
ObjectivesObjectivesObjectivesObjectives
7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.
ObjectivesObjectivesObjectivesObjectives
8. Describe the financial statements of a corporation and explain how they interrelate.
9. Use the ratio of liabilities to stockholders’ equity to analyze the ability of a business to withstand poor business conditions.
Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
ProductProduct ProductProduct
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
Types of Businesses
Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProduct ProductProduct
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Types of Businesses
Service BusinessService BusinessService BusinessService Business
ProductProduct ProductProduct
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Types of Businesses
There are three types of business organizations
There are three types of business organizations
Proprietorship Partnership Corporation
A proprietorship is owned by one
individual.
A proprietorship is owned by one
individual.
Advantages• Ease in organizing• Low cost of
organizing
Disadvantage• Limited source of
financial resources• Unlimited liability
Joe’s
A partnership is owned by two or more individuals.
A partnership is owned by two or more individuals.
Advantages• More financial
resources than a proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
Joe and Marty’s
A corporation is organized under state or federal statutes as a separate legal entity.
A corporation is 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.
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
A business strategy is an integrated set of plans and actions designed to
enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a low-cost strategy, a business designs and produces products or
services of acceptable quality at a cost lower than that of its competitors.
Wal-Mart
Southwest Airlines
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a differential strategy, a business designs and produces products or services
that possess unique attributes or characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business
A value chain is the way a business adds value for its
customers by processing inputs into product or service.
InputsInputsBusiness Business ProcessesProcesses
Products or Products or ServicesServices
Customer Customer ValueValue
A business stakeholder is a person or entity having an interest in the
economic performance of the business.
Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders
2Assess stakeholders’ informational needs.
The Process of Providing The Process of Providing InformationInformation
The Process of Providing The Process of Providing InformationInformation
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
1Identify stake-holders.
Accounting Information
System
Design the accounting information system to meet stakeholders’ needs.
34Record economic data about business activities and events.
The Process of Providing The Process of Providing InformationInformation
The Process of Providing The Process of Providing InformationInformation
5Prepare accounting reports for stakeholders.
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
Accounting Information
System
The Process of Providing The Process of Providing InformationInformation
The Process of Providing The Process of Providing InformationInformation
Business EthicsBusiness EthicsBusiness EthicsBusiness 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 that
form the foundation for
ethical behavior
Sound Principles that
form the foundation for
ethical behavior
Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting
Accountants employed by a business firm or a not-for-profit organization are said to be
engaged in private 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 be
employed in public accounting.
Accountants and their staff who provide services on a fee basis are said to be
employed in public accounting.
Generally Accepted Generally Accepted Accounting Accounting
Principles (GAAP)Principles (GAAP)
Generally Accepted Generally Accepted Accounting Accounting
Principles (GAAP)Principles (GAAP)
The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.
The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.
The cost concept is the basis for entering the
exchange price, or cost of an acquisition in the
accounting records.
The cost concept is the basis for entering the
exchange price, or cost of an acquisition in the
accounting records.
The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based
upon objective evidence.upon objective evidence.
The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based
upon objective evidence.upon objective evidence.
The unit-of-measure concept requires that
economic data be recorded in dollars.
The unit-of-measure concept requires that
economic data be recorded in dollars.
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners’ Equity
The resources owned by a
business
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners’ Equity
The rights of the creditors, which represent debts of the business
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners’ Equity
The rights of the owners
What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2008, Saeed
Ajmal organized a corporation that will be known as
NetSolutions.
a. Saeed Ajmal deposits $25,000 in a bank a. Saeed Ajmal deposits $25,000 in a bank account in the name of NetSolutions in account in the name of NetSolutions in return for shares of stock in the return for shares of stock in the corporation.corporation.
a. Saeed Ajmal deposits $25,000 in a bank a. Saeed Ajmal deposits $25,000 in a bank account in the name of NetSolutions in account in the name of NetSolutions in return for shares of stock in the return for shares of stock in the corporation.corporation.
Capital Stock25,000 Investment by
stockholder
Cash25,000 a.
Assets Owners’ Equity=
=
b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.
Capital Stock25,000
Cash + Land 25,000 Bal.
Assets Owners’ Equity=
=b. –20,000 +20,000Bal. 5,000 20,000 25,000
Accounts CapitalCash + Supplies + Land Payable Stock
Assets
c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).
c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton 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
=
d. + 7,500 + 7,500
Assets
d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
Owners’ Liab . + Equity=
Bal. 5,000 1,350 20,000 1,350 25,000=
Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
Fees earned
e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
Assets Owners’ Liab . + Equity
Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings
e. – 3,650 –2,125– 800– 450– 275
=
Bal. 8,850 1,350 20,000 1,350 25,000 3,850
= ExpensesExpenses
f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.
f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.
Assets Owners’ Liab . + Equity
Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings
Bal. 8,850 1,350 20,000 1,350 25,000 3,850
=
= f. – 950 – 950Bal. 7,900 1,350 20,000 400 25,000 3,850
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
Assets Owners’ Liab . + Equity
Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings
=
= Bal. 7,900 1,350 20,000 400 25,000 3,850g. – 800 – 800Bal. 7,900 550 20,000 400 25,000 3,050
Supplies Supplies ExpenseExpense
h. At the end of the month, NetSolutions h. At the end of the month, NetSolutions pays $2,000 to stockholders.pays $2,000 to stockholders.
h. At the end of the month, NetSolutions h. At the end of the month, NetSolutions pays $2,000 to stockholders.pays $2,000 to stockholders.
Assets Owners’ Liab . + Equity
Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings
= Bal. 7,900 550 20,000 400 25,000 3,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 25,000 1,050
=
=
DividendsDividends
Increased byIncreased by
Capital Stock
Effects of Transactions on Owners’ EquityEffects of Transactions on Owners’ EquityEffects of Transactions on Owners’ EquityEffects of Transactions on Owners’ Equity
Stockholders’ Stockholders’ investmentsinvestments
+
Decreased byDecreased byIncreased byIncreased by
Retained Earnings
Effects of Transactions on Owners’ EquityEffects of Transactions on Owners’ EquityEffects of Transactions on Owners’ EquityEffects of Transactions on Owners’ Equity
RevenuesRevenues
+
ExpensesExpenses
–
Decreased byDecreased by
DividendsDividends
–
Accounting reports, called financial statements, provide summarized
information to the users.
Accounting reports, called financial statements, provide summarized
information to the users.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements• Income statement—A summary of the
revenue and expenses for a specific period of time.
• Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time.
• Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date.
• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00Wages expense
800 00
Supplies expense
450 00Utilities expense
275 00Miscellaneous expense
Total operating expenses 4 450 00
NetSolutionsIncome Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00
Transfer this Transfer this amount to the amount to the
retained earnings retained earnings statement.statement.
Transfer this Transfer this amount to the amount to the
retained earnings retained earnings statement.statement.
NetSolutionsRetained Earnings Statement
For the Month Ended November 30, 2005
Less dividends 2 000 00Retained earnings, November 30, 2005 $1 050 00
Net income for November $3 050 00From the income From the income statementstatement
From the income From the income statementstatement
Transferred to the Transferred to the balance sheetbalance sheet
Transferred to the Transferred to the balance sheetbalance sheet
Assets Liabilities
NetSolutionsBalance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Stockholders’ Equity
Land 20 000 00 Capital Stock $25,000
Ret. Earnings l,050 26 050 00
Total liabilities and
Total assets $26 450 00 stockholder’s equity $26 450 00
From the From the retained earnings retained earnings
statementstatement
From the From the retained earnings retained earnings
statementstatement
This balance sheet presented using the account form
When the balance sheet displays the liabilities and stockholders’
equity below the assets, the report form is being used.
When the balance sheet displays the liabilities and stockholders’
equity below the assets, the report form is being used.
Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 00
Cash flows from investing activities:Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2005
Should match Should match CashCash on the balance sheet on the balance sheetShould match Should match CashCash on the balance sheet on the balance sheet
)
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsCash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations.
Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets.Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
Ratio of liabilities to stockholders’
equity
=Total Liabilities
Total stockholders’ equity
The ratio of liabilities to stockholders’ equity allows bankers, creditors, and other stakeholders a means of analyzing the corporation’s ability to
withstand poor business conditions.
The ratio of liabilities to stockholders’ equity allows bankers, creditors, and other stakeholders a means of analyzing the corporation’s ability to
withstand poor business conditions.
Financial Analysis and Financial Analysis and InterpretationInterpretation
Financial Analysis and Financial Analysis and InterpretationInterpretation
Ratio of liabilities to stockholders’
equity=
$400
$26,050
= 0.015Ratio of liabilities to stockholders’
equity
Financial Analysis and Financial Analysis and InterpretationInterpretation
Financial Analysis and Financial Analysis and InterpretationInterpretation
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