Transcript Slide 1

Chapter 1
Business Decisions and Financial
Reporting
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
Describe various
organizational forms
and business
decision-makers.
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Organizational Forms
Sole
Proprietorship
Business organization owned by
one person. The owner is
personally liable for all debts of
the business.
Partnership
Business organization owned by
two or more people. Each partner
is personally liable for all debts of
the business.
Corporation
A separate entity from both a legal
and accounting perspective.
Owners of corporations
(stockholders) are not personally
responsible for debts of the
corporation.
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Organizational Forms
Corporations
Public
Companies
Private
Companies
Have their stock bought
and sold on stock
exchanges.
Have their stock bought
and sold privately.
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Accounting for Business Decisions
Accounting
System
Produces
Financial
Accounting
Reports
Managerial
Accounting
Reports
Provided to
External Users
Creditors
Investors
Others
Internal Users
Managers
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Learning Objective 2
Describe the purpose,
structure, and content
of the four basic
financial statements.
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The Basic Accounting Equation
Resources Owned . . .
by the company
Resources Owed . . .
to creditors
to stockholders
Separate Entity
Assumption
Requires that a business’s
financial reports include
only the activities of the
business and not those of
its stockholders.
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Assets
Resources controlled by the
company that have
measurable value and are
expected to provide future
benefits to the company.
Cash
Equipment
Supplies
Furniture
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Liabilities
Amounts owed by
the business to
creditors.
Notes
Payable
Accounts
Payable
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Stockholders’ Equity
Owners’ claim to the
business resources.
Stock Certificate
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Revenues, Expenses and Net
Income
Revenues
Sales of goods or services to
customers. They are
measured at the amount
the business charges the
customer.
Expenses
The costs of business
necessary to earn
revenues, including wages
to employees, advertising,
insurance, and utilities.
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Dividends
Payments a company
periodically makes to its
stockholders as a return
on their investment.
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Financial Statements
Balance
Sheet
Income
Statement
Statement
of Retained
Earnings
Statement
of Cash
Flows
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Financial Statement Equations
Balance Sheet
Income Statement
Dividends
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The Income Statement
Purpose
Reports the amount of
revenues less expenses
for a period of time.
Unit of Measure
Results of business
activities should be
reported in an
appropriate monetary
unit, which in the United
States is the U.S. dollar.
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2008
Revenues
Sales revenue
$ 11,000
Total revenue
11,000
Expenses
Supplies expense
Wages expense
Rent expense
Utilities expense
Insurance expense
Advertising expense
Total expenses
Net income
$
4,000
2,000
2,000
600
300
100
9,000
2,000
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The Income Statement
Financial Statement
Heading
All financial statements
start with a heading that
answers three
questions:
Who
What
When
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2008
Revenues
Sales revenue
$ 11,000
Total revenue
11,000
Expenses
Supplies expense
Wages expense
Rent expense
Utilities expense
Insurance expense
Advertising expense
Total expenses
Net income
$
4,000
2,000
2,000
600
300
100
9,000
2,000
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The Statement of Retained Earnings
Purpose
Reports the way that net
income and the
distribution of dividends
affected the financial
position of the company
during the period.
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2008
Retained earnings, Sept. 1, 2008
$
Add: Net income
2,000
Subtract: Dividends
(1,000)
Retained earnings, Sept. 30, 2008
$ 1,000
The financial statement heading answers the three
questions who, what, and when.
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The Balance Sheet
Purpose
Reports at a point in time:
1. What a business owns
(assets)
2. What it owes to creditors
(liabilities)
3. What is left over for the
owners of the company’s
stock (stockholders’
equity).
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2008
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities
Accounts payable
Notes payable
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$
7,000
20,000
27,000
30,000
1,000
31,000
$ 58,000
The financial statement heading answers the three
questions who, what, and when.
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The Balance Sheet
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2008
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities
Accounts payable
Notes payable
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$
7,000
20,000
27,000
30,000
1,000
31,000
$ 58,000
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
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The Balance Sheet
Assets are listed in order
of liquidity, that is, how
quickly they are used up
or converted into cash.
Notes payable are like
accounts payable except
that they: (1) are not
interest free; (2) will not
be paid as soon; and (3)
are formal written debt
contracts.
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2008
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities
Accounts payable
Notes payable
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$
7,000
20,000
27,000
30,000
1,000
31,000
$ 58,000
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The Statement of Cash Flows
Purpose
Summarizes how a
business’s operating,
investing and financing
activities caused its cash
balance to change over a
particular period of time.
PIZZA AROMA, INC.
Statement of Cash Flows
For the Month Ended September 30, 2008
Cash Flows from Operating Activities
Cash collected from customers
$ 10,000
Cash paid to suppliers and employees
(5,000)
Cash provided by operating activities
5,000
Cash Flows from Investing Activities
Cash paid to buy equipment
(40,000)
Cash used in investing activities
(40,000)
Cash Flows from Financing Activities
Capital contributed by stockholders
30,000
Cash dividends paid to stockholders
(1,000)
Cash borrowed from the bank
20,000
Cash provided by financing activities
49,000
Change in cash
14,000
Beginning cash balance, Sept. 1, 2008
Ending cash balance, Sept. 30, 2008
$ 14,000
The financial statement heading answers the three
questions who, what, and when.
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Relationships Among the
Financial Statements
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2008
Revenues
Sales revenue
$ 11,000
Total revenue
11,000
Expenses
Supplies expense
Wages expense
Rent expense
Utilities expense
Insurance expense
Advertising expense
Total expenses
Net income
$
4,000
2,000
2,000
600
300
100
9,000
2,000
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2008
Retained earnings, Sept. 1, 2008
$
Add: Net income
2,000
Subtract: Dividends
(1,000)
Retained earnings, Sept. 30, 2008
$ 1,000
Net income
flows from the
Income
Statement to
the Statement
of Retained
Earnings.
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Relationships Among the
Financial Statements
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2008
Revenues
Sales revenue
$ 11,000
Total revenue
11,000
Expenses
Supplies expense
Wages expense
Rent expense
Utilities expense
Insurance expense
Advertising expense
Total expenses
Net income
Ending Retained
Earnings flows
4,000
2,000 the
from
2,000
600
Statement
of
300
100
Retained
9,000
$ 2,000
Earnings to the
Balance Sheet.
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2008
Retained earnings, Sept. 1, 2008
$
Add: Net income
2,000
Subtract: Dividends
(1,000)
Retained earnings, Sept. 30, 2008
$ 1,000
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2008
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities
Accounts payable
Notes payable
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$
7,000
20,000
27,000
30,000
1,000
31,000
$ 58,000
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Relationships Among the
Financial Statements
PIZZA AROMA, INC.
Statement of Cash Flows
For the Month Ended September 30, 2008
Cash Flows from Operating Activities
Cash collected from customers
$ 10,000
Cash paid to suppliers and employees
(5,000)
Cash provided by operating activities
5,000
Cash Flows from Investing Activities
Cash paid to buy equipment
(40,000)
Cash used in investing activities
(40,000)
Cash Flows from Financing Activities
Capital contributed by stockholders
30,000
Cash dividends paid to stockholders
(1,000)
Cash borrowed from the bank
20,000
Cash provided by financing activities
49,000
Change in cash
14,000
Beginning cash balance, Sept. 1, 2008
Ending cash balance, Sept. 30, 2008
$ 14,000
Cash on the Balance Sheet and
Cash at End of Year on the
Statement of Cash Flows agree.
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2008
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities
Accounts payable
Notes payable
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$
7,000
20,000
27,000
30,000
1,000
31,000
$ 58,000
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Notes to the Financial Statements
Notes help financial
statement users
understand how the
amounts were
derived and what
other information
may affect their
decisions.
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Learning Objective 3
Explain how financial
statements are
relevant to users.
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Relevance to Financial Statement
Users
Creditors
(1) Is the company
generating
enough cash to
make payments
on its loans?
(2) Does the
company have
enough assets
to cover its
liabilities?
Investors
(1) What is the
immediate return
on my
contributions
(through
dividends)?
(2) What is the longterm return (by
selling my stock
in the market)?
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Learning Objective 4
Describe factors that
enhance the reliability
of financial reporting.
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Generally Accepted Accounting
Principles (GAAP)
GAAP are the underlying rules for financial reporting and are
established by the Financial Accounting Standards Board
(FASB) under the authority granted by the Securities and
Exchange Commission (SEC).
SEC
FASB
GAAP
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Generally Accepted Accounting
Principles (GAAP)
Under authority granted by the SEC, The Public Company
Accounting Oversight Board (PCAOB) establishes the rules
used by auditors, who report on whether a company’s
financial statements are, in fact, prepared following GAAP.
PCAOB
Auditing
Rules
SEC
Auditors report
whether
companies used
GAAP
FASB
GAAP
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Accounting Ethics
Sarbanes-Oxley Act of 2002
Top managers sign a
report certifying their
responsibilities for the
financial statements
Maintain an audited
system of internal controls
to ensure accuracy in
accounting reports
Maintain an independent
committee to ensure
managers cooperate with
auditors
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Chapter 1
Supplement
Accounting Careers
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of Career Choices in Accounting
Private Accounting
Public company
Private company
Nonprofit organization
Multinational
Mid-sized
Small
Public Accounting
Type of Organization
CPA firm
Size of Organization
"Big 4" (international partnerships):
Deloitte & Touche, Ernst & Young,
KPMG, PricewaterhouseCoopers
Regional
Local (partnership or proprietorship)
Auditing (assurance services)
Taxation
General accounting
Consulting such as forensic
Budgeting
(fraud) accounting, computer
Cost accounting
systems security, outsourcing,
Taxation
Functions and Specializations
bookkeeping services, and
Internal auditing
industry specialization
Others (e.g., finance, information
(e.g., high tech, banking,
systems, forecasting)
mergers and acquisitions,
and communications)
$30,000-$43,000*
$36,000-$52,000*
depending on type, size,
depending on size, geographic
Starting Salaries
geographic location, and
location, and functional area or
functional area
specialization
Chief Financial Officer (CFO),
Senior Accountant,
Controller, Treasurer,
Typical Senior Positions
Manager,
Director of Accounting
Partner
Source: www.collegegrad.com/careers/all.shtml
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End of Chapter 1
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