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Chapter 1
Introduction to Accounting
and Business
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Describe the nature of a business.
After
studying this
2. Describe the role
of accounting
in business.
chapter, you
should ethics and
3. Describe the importance
of business
to:ethical conduct.
the basic principlesbe
of able
proper
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.
Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to
analyze the ability of a business to withstand
poor business conditions.
Types of Businesses
Manufacturing Business
Product
General Motors
Intel
Boeing
Nike
Coca-Cola
Sony
Cars, trucks, vans
Computer chips
Jet aircraft
Athletic shoes and apparel
Beverages
Stereos and television
Types of Businesses
Merchandising Business
Product
Wal-Mart
Toys “R” Us
Circuit City
Lands’ End
Amazon.com
General merchandise
Toys
Consumer electronics
Apparel
Internet books, music, video
retailer
Types of Businesses
Service Business
Product
Disney
Delta Air Lines
Marriott Hotels
Merrill Lynch
Sprint
Entertainment
Transportation
Hospitality and lodging
Financial advice
Telecommunication
There are three types of
business organizations
 Proprietorship
 Partnership
 Corporation
A proprietorship
is owned by one
individual.
Joe’s
Advantages
• Ease in organizing
• Low cost of
organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
A partnership is
owned by two or
more individuals.
Joe and Marty’s
Advantages
• More financial
resources than a
proprietorship.
• Additional
management skills.
Disadvantage
• Unlimited liability.
A corporation is
organized under state
or federal statutes as a
separate legal entity.
J & M, Inc.
Advantage
• The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
• Double taxation.
Business 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 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 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 Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs
Business
Processes
Products or
Services
Customer
Value
Business Shareholders
A business shareholder is a person or
entity having an interest in the
economic performance of the business.
The Process of
Providing Information
1
Identify
shareholders.
Internal:
Owners,
managers,
employees
Shareholders
External:
Customers,
creditors,
government
2
Assess
shareholders’
informational
needs.
The Process of
Providing Information
4
Record
economic
data about
business
activities
and events.
Accounting
Information
System
3
Design the
accounting
information
system to meet
shareholders’
needs.
The Process of
Providing Information
shareholders
Internal:
Owners,
managers,
employees
5
Prepare
accounting
reports for
shareholders.
External:
Customers,
creditors,
government
Accounting
Information
System
Business Ethics
Sound
Principles that
form the
foundation for
ethical
behavior
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.
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 be
employed in public accounting.
Generally Accepted Accounting
Principles (GAAP) in UNA
International Accounting Standards
(IASs) for International Accounting
Community
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
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 objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the
creditors, which
represent debts
of the business
The Accounting Equation
Assets = Liabilities + Owner’s 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,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
a.
Assets
=
Cash
25,000
=
Owner’s Equity
Chris Clark, Capital
25,000 Investment
by Chris
Clark
b. NetSolutions exchanged $20,000 for land.
Assets
Cash + Land
Bal. 25,000
b. –20,000
+20,000
Bal. 5,000
20,000
=
=
Owner’s Equity
Chris Clark, Capital
25,000
25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Assets
=
Cash + Supplies + Land
Bal. 5,000
c.
Bal. 5,000
20,000
+ 1,350
1,350
20,000
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
=
25,000
+ 1,350
1,350
25,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Assets
Cash + Supplies + Land
Bal. 5,000
1,350
20,000
d. + 7,500
Bal. 12,500
1,350
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
25,000
+ 7,500 Fees
earned
1,350
32,500
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Assets
=
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. – 3,650
Bal.8,850
1,350
20,000
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
32,500
–2,125 Wages
– 800 Rent
– 450 Util.
– 275 Misc.
1,350
28,850
f. NetSolutions paid $950 to
creditors during the month.
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f.
– 950
Bal. 7,900
1,350
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
28,850
– 950
400
28,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
– 800
Bal. 7,900
550
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,850
– 800 Supplies
expense
400
28,050
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. –2,000
Bal. 5,900
550
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,050
–2,000 Withdrawal
400
26,050
Effects of Transactions on Owner’s Equity
Owner’s Equity
Decreased by
Increased by
Owner’s
withdrawals
Owner’s
investments
Expenses
Revenues
Net
income
Accounting reports, called
financial statements,
provide summarized
information to the owner.
Financial Statements
• Income statement—A summary of the revenue
and expenses for a specific period of time.
• Statement of owner’s equity—A summary of
the changes in the owner’s equity that have
occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the
cash receipts and disbursements for a specific
period of time.
NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned
$7 500 00
Operating expenses:
Wages expense
$2 125 00
800 00
Rent expense
Supplies expense
Utilities expense
800 00
450 00
Miscellaneous expense
Total operating expenses
Net income
To the statement
of owner’s equity
275 00
1 135 00
$3 050 00
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005
Investment on November 1
From the income
Net income for November
statement
$
0
$25 000 00
3 050 00
$28 050 00
2 000 00
Less withdrawals
Increase in owner’s equity
To
the
Chris Clark, capital, November 30, 2005
balance sheet
26 050 00
$26 050 00
NetSolutions
Balance Sheet
November 30, 2005
From the
statement of
Liabilities owner’s equity
Assets
Cash
Supplies
Land
$ 5 900 00 Accounts Payable $
400 00
550 00 Owner’s Equity
20 000 00 Chris Clark, cap.
26 050 00
Total liabilities and
Total assets
$26 450 00
owner’s equity
This balance sheet presented
using the account form
$26 450 00
When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form is
being used.
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
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 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 00
Net cash flow from financing activities
23 000 00
Net cashShould
flow and
Nov.
30, 2005
bal. sheet
$ 5 900 00
match
Cash
on thecash
balance
Statement of Cash Flows
Cash 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.
Tools for Financial
Analysis and Interpretation
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
Total Liabilities
Ratio of liabilities
=
to owner’s equity
Total owner’s equity (or total
stockholders’ equity)
Tools for Financial
Analysis and Interpretation
Ratio of
$400
liabilities to =
$26,050
owner’s equity
Ratio of
liabilities to = 0.015
owner’s equity
Chapter 1
The End