Chapter – Introduction to Accounting and Business After studying this chapter, you should be able to: Describe the nature of a business and the role of accounting in business Summarize the development of accounting principles and relate them to practice State the accounting equation and define each element of the equation Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation Describe the financial statements of a proprietorship Objective #1 - Describe the nature of a business and the role of accounting in business 1-1 Types of Businesses Service ServiceBusiness Business The The Walt Walt Disney Disney Company Company Atlas AtlasAir Air Marriott Marriott International International Hotels Hotels Service Service Entertainment Entertainment Transportation Transportation Hospitality Hospitalityand and lodging lodging Bank Bank of of America America Corporation Corporation Financial Financial services services XM Satellite XM Satellite Satellite Radio Radio Satellite radio radio 1-1 Types of Businesses Merchandising MerchandisingBusiness Business Wal-Mart Wal-Mart GameStop GameStopCorporation Corporation Best Best Buy Buy Gap Gap Inc Inc Amazon.com Amazon.com Product Product General General merchandise merchandise Video Video games gamesand and accessories accessories Consumer Consumer electronics electronics Apparel Apparel Internet Internet books, books, music, music, video video 1-1 Types of Businesses Manufacturing Manufacturing Business Business General General Motors Motors Corp Corp Samsung Samsung Dell Dell Inc Inc Nike Nike Pepsico Pepsico Sony Sony Corporation Corporation Product Product Cars, Cars, trucks, trucks, vans vans Cell Cell phones phones Personal Personal computers computers Athletic Athletic shoes shoesand and apparel apparel Beverages Beverages and and Snacks Snacks Stereos Stereos and and televisions televisions Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business 1-1 Who are stakeholders? – anyone or any entity that has an interest in the economic performance and well-being of a business Bankers and other creditors – need to ensure that the business has the ability to repay loans, and on a timely basis Suppliers – need to ensure their customer (the business) will be around to purchase their supplies and then be able to pay for them Customers – are interested in the business to determine if they will always be around to provide a constant flow of goods and services Government – need to ensure that the business pays the correct amount of taxes Employees and Management– need to ensure that the business is doing well so that they will have a job Different types of Accounting 1-1 Financial accounting is primarily concerned with the recording & reporting of economic data and activities for a business to external parties Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting E.g CFO, Controller, or Financial Analyst of Pepsico Accountants and their staff who provide services to the public (i.e individuals and corporations) on a fee basis are said to be employed in public accounting E.g PricewaterhouseCoopers, Ernst & Young, KPMG, 6Deloitte Objective #2 - Summarize the development of accounting principles and relate them to practice 1-2 GAAP – Generally Accepted Accounting Principles These are the rules that govern how businesses record and report financial transactions FASB – Financial Accounting Standards Board This body is the major one responsible for preparing US GAAP IASB – International Accounting Standards Board This body is the one responsible for preparing International GAAP, which is also known as ‘International Financial Reporting Standards (IFRS)’ The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business – i.e nothing personal unless it has been given/assigned to the business The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records – e.g what was paid for it 1-1 Common Forms of Business Entities  Proprietorship  Partnership  Corporation  Limited liability company A proprietorship is owned by one individual and—     1-1 Comprises 70% of business organizations in the United States Requires low cost of organizing Is limited to financial resources of the owner Is used by small businesses A partnership is similar to a proprietorship except that it is owned by two or more individuals and—  Comprises 10% of business organizations in the United States  Combines the skills and resources of more than one person 1-1 A corporation is organized under state or federal statues as a separate legal taxable entity and—  Generates 90% of the total dollars of business receipts received  Comprises 20% of the businesses  Includes ownership divided into shares of stock, sold to shareholders (stockholders)  Is able to obtain large amounts of resources by issuing stock  Is used by large businesses 10 Statement of Owner’s Equity 1-5 From the income statement To the balance sheet 34 1-5 A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date 35 Balance Sheet This amount is compared to the net cash flow on the statement of cash flows 1-5 From the statement of owner’s 36 equity 1-5 A statement of cash flows is a summary of the cash receipts and payments for a specific period of time Note - It basically shows how the company spent its money, and the sources from which it received money 37 Statement of Cash Flows 1-5 This amount should match 38 Cash on the balance sheet 1-5 Example Exercise 1-4, 1-5 & 1-6 The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below The capital of the owner, Adam Cellini, was $80,000 at May 1, 2009, the beginning of the current year Accounts payable $ 12,200 Miscellaneous expense $ 12,950 Accounts receivable 31,350 Office expense 63,000 Cash 53,050 Supplies 3,350 Adam Cellini invested an additional $50,000 in the business during the year and Fees earned 263,200 withdrew cash of $30,000 for personal use Wages expense 131,700 80,000 For Land the current year ended April 30, 2010 a Prepare an income statement b Prepare a statement of owner’s equity c Prepare a balance sheet 39 1-5 Example 1-5& 1-6 ExampleExercise Exercise1-4 1-4,&1-5 CHICKADEE TRAVEL SERVICE INCOME STATEMENT For the Year Ended April 30, 2010 Fees earned $263,200 Expenses: Wages expense Office expense Miscellaneous expense Total expenses 207,650 Net income 55,550 $131,700 63,000 12,950 $ 40 1-5 Example Exercise 1-4, 1-5 & 1-6 CHICKADEE TRAVEL SERVICE STATEMENT OF OWNER’S EQUITY For the Year Ended April 30, 2010 Adam Cellini, capital, May 1, 2009 $ 80,000 Additional investment by owner during year Net income for the year $ 50,000 55,550 $105,550 30,000 Less withdrawals Increase in owner’s equity 75,550 Adam Cellini, capital, April 30, 2010 $155,550 41 1-5 Balance Sheet The account form of balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to design of an account The report form of balance sheet presents the liabilities and owner’s equity sections below the assets section 42 1-5 Example Exercise 1-4, 1-5 & 1-6 Assets CHICKADEE TRAVEL SERVICE BALANCE SHEET April 30, 2010 Cash Accounts payable Accounts receivable Supplies Owner’s Equity Land Adam Cellini, capital Total assets Total liab & owner’s eq Liabilities $ 53,050 $12,200 31,350 3,350 80,000 155,550 $167,750 $167,750 43 1-5 Statement of Cash Flows The statement of cash flows consists of three sections: (1) Operating activities (2) Investing activities (3) Financing activities 44 The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations 1-5 The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner 45 1-5 Example Exercise 1-7 A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below Cash receipts: Cash received from customers $251,000 Cash received from additional investment of owner 50,000 Cash payments: Cash paid for expenses 210,000 The cash as of May 1, 2009, was $72,050 Cash balance paid for land 80,000 PrepareCash a statement of cash flows for paid to owner for personal useChickadee Travel Service for the year ended April 30, 2010 30,000 46 1-5 Follow My Example 1-7 CHICKADEE TRAVEL SERVICE STATEMENT OF CASH FLOWS For the Year Ended April 30, 2010 Cash flows from operating activities: Cash received from customers Deduct cash payments for expenses Net cash flows from operating activities 41,000 Cash flows from investing activities: Cash payments for purchase of land (80,000) Cash flows from financing activities: Cash received from owner as investment Deduct cash withdrawals by owner Net cash flows from financing activities 20,000 Net decrease in cash during year $(19,000) Cash as of May 1, 2009 72,050 $251,000 210,000 $ 50,000 30,000 47 $ Financial Analysis and Interpretation Ratio of Liabilities to Owner’s Equity For NetSolutions: Ratio of Liabilities to Owner’s Equity = = Total Liabilities Total Owner’s Equity (or Total Stockholders’ Equity) $400 $26,050 = 0.015 48 48 [...]... combines attributes of a partnership and a corporation in that it is organized as a corporation However, a limited liability corporation can elect to be taxed as a partnership and  Is a popular alternative to a partnership  Has tax and liability advantages to the owners 11 Objective #3 - State the accounting equation and define each element of the equation The Accounting Equation Assets = Liabilities... Liabilities + Owner’s Equity The resources owned The rights of the by a business owners The rights of the creditors, which represent debts of the business 12 1-3 Objective #4 - Describe and illustrate how business transactions can be recorded in terms of the 1-4 resulting change in the basic elements of the accounting equation A business transaction is an economic event or condition that directly changes... Assets Liabilities + Cash + Supplies + Land Bal d Bal 5,000 +7,500 1,350 12,500 20,000 = 1,350 Accounts Payable 1,350 20,000 1,350 Owner’s Equity Chris Clark, Fees + Capital + Earned 25,000 +7,500 25,000 7,500 d NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash Note – If the customers did not pay immediately, but opted to pay on account ( i.e at a later... land for $20,000 15 1-4 Assets Cash + Supplies + Land = 5,000 20,000 Bal 25,000 c +1,350 1,350 20,000 +1,350 5,000 Bal 25,000 Owner’s Liabilities + Equity Accounts Chris Clark, Payable Capital 1,350 c During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account) Note – these supplies e.g wires, cables etc, will be used up later in the business. .. withdrew $2,000 in cash from the business for personal use 27 –450 – h – Summary 28 1-4 Owner’s Equity Increased by Decreased by Owner’s investments Owner’s withdrawals Revenues Expenses 29 Objective #5 - Describe the financial statements of a proprietorship and explain how they interrelate 1-5 Accounting reports, called financial statements, provide summarized information to the owner The 4 common financial... accounts receivable 18 1-4 Note……… 1 Adding expenses to the owner’s equity section results in a space problem To adjust for these added headings, the word “Bal.” has been omitted from some slides The bottom row still provides the balances after each transaction 2 Beginning with entry (e) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide... –2,125 –800 1,350 25,000 7,500 –450 – 275 e NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 21 1-4 Assets Cash Bal 20,000 f Bal 20,000 + Supplies + Land 8,850 1,350 –950 7,900 1,350 f NetSolutions paid $950 to creditors during the month 22 1-4 Liabilities + Owner’s Equity Accounts Chris Clark, Fees Wages Rent Utilities Misc Payable + Capital... Expense –2,125 –800 –450 – 1,350 25,000 275 7,500 f –950 400 25,000 7,500 –2,125 –800 275 f NetSolutions paid $950 to creditors during the month 23 –450 – 1-4 Assets Cash + Supplies + Land Bal 7,900 1,350 20,000 g 7,900 550 –800Bal 20,000 g At the end of the month, the cost of supplies on hand is $550, so $800 of supplies must have been used up 24 1-4 Liabilities + Owner’s Equity Accounts Chris Clark,... November 1, 2007, Chris Clark begins a business that will be known as NetSolutions This business provides web design services, and computer repair services etc 13 1-4 Assets a Cash 25,000 = = Owner’s Equity Chris Clark, Capital 25,000 Investment by Chris Clark a Chris Clark deposits $25,000 in a bank account in the name of NetSolutions 14 1-4 Assets = Cash + Land Bal 25,000 = b –20,000 +20,000 Bal... –800 400 25,000 7,500 –2,125 –800 –800 g At the end of the month, the cost of supplies on hand is $550, so $800 of supplies must have been used up 25 –450 –275 1-4 Assets Cash Bal 20,000 h Bal 20,000 + Supplies + Land 7,900 550 –2,000 5,900 550 h At the end of the month, Chris withdrew $2,000 in cash from the business for personal use 26 1-4 Liabilities + Owner’s Equity Accounts Chris Clark, Chris Clark ... that the business has the ability to repay loans, and on a timely basis Suppliers – need to ensure their customer (the business) will be around to purchase their supplies and then be able to pay... economic data and activities for a business to external parties Managerial accounting uses both financial accounting and estimated data to aid management in running day -to- day operations and in planning... shoesand and apparel apparel Beverages Beverages and and Snacks Snacks Stereos Stereos and and televisions televisions Accounting can be defined as an information system that provides reports to