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HFT 3431 Chapter 1 Introduction to Managerial Accounting The Accounting Profession • Financial • Cost • Managerial • Tax • Auditing • Governmental Users of Financial Information • Owners • Creditors • Managers • Governments • Investors Financial vs. Managerial Accounting • Financial accounting is historical • Managerial accounting focuses on analysis, information, enhanced controls and planning Managerial Accounting • Management is choosing from alternative • • • • courses of action Managerial accounting is concerned with serving internal decision makers Managerial accounting links with cost accounting Provides financial statement analysis and interpretation Financial accounting is concerned with serving external decision makers End Products Used from Financial Accounting • Balance Sheet (Ch 2) • Income Statement (Ch 3) • Statement of Cash Flows (Ch 4) The Hospitality Business • Hotels, motels, motor inns • All types of food service • Theme parks • Transportation services • Entertainment • Recreational facilities • Convention services The Hospitality Business • • • • Seasonal business Fluctuating demand Short conversion time – food & beverage Selling space – Perishable product – It’s now or never • Labor intensive • Intensive fixed asset requirement Accounting Review • Uniform System of Accounts • Generally Accepted Accounting Principles (GAAP) • International Financial Reporting System (Near future) Principles of Accounting • • • • • • • • • • Cost Business Entity Continuity of the Business Unit Unit of Measurement Objective Evidence Full Disclosure Consistency Matching Conservatism Materiality Cost Principle States that when a transaction is recorded, the transaction price (cost) establishes the accounting value Business Entity Statements are based on the concept that each business maintains its own accounts, & that these accounts are separate from other interests of the owners Continuity of the Business Unit The assumption that the business will continue indefinitely Unit of Measurement • All transactions are expressed in monetary terms Objective Evidence Accounting records are based on objective evidence ( invoices, checks, cash register receipts) Full Disclosure Financial statements must provide all information pertinent to interpretation of the financial statements Consistency The same accounting method from time period to time period Matching Match revenues with expenses Cash versus accrual Conservatism Recognize expenses as soon as possible, but delay recognition of revenues until they are sure Materiality Events or information must be accounted for if they make a difference to the financial statements Cash vs. Accrual Accounting • Cash basis accounting – Recognize revenue when cash received, expense when cash disbursed • Accrual basis accounting – Recognize revenue when earned – Recognize expense when incurred Fundamentals of Accounting • Balance Sheet Assets (Things Owned) = Liabilities ( Obligations ) + Equity ( Residual Claims on Assets ) Fundamentals of Accounting • Income Statement Revenues - Expenses = Net Income (Loss) Temporary Accounts are Netted and Closed to Equity (retained earnings) Fundamental Equation • Assets = Liabilities + Owners Equity • Assets = Liabilities + Permanent OE + Temporary OE • Assets = Liabilities + Permanent OE + Revenue - Expenses Assets • Resources owned by a business – Common characteristic – the capacity to provide future benefit or service – Use for the purpose production, consumption and exchange of goods or services – Future economic benefits results in cash inflows Liabilities • Claims against assets • Creditors • Existing debts and obligations – Accounts payable – Notes payable – Wages payable – Sales, Real Estate and Income Taxes payable Equity • Claims of the owners on the assets • Corporations – Paid in capital – Retained earnings – Revenues – Expenses – Dividends • Revenues > Expenses = Net Income • Revenues < Expenses = (Net Loss) Transactions • Transactions defined: economic events of the • • • • enterprise recorded Each transaction may be internal or external Each transaction must identify the specific items affected and the net change on each item Each transaction has a dual effect on the accounting equation The two sides of the accounting equation must always equal Effects of Transactions on the Accounting Equation • Increase in an asset – Decrease in another asset – Increase in a liability – Increase in owners equity • Increase in a liability – Increase in an asset – Decrease in another liability – Decrease in owners equity • Increase in owners equity – Increase in an asset – Decrease in liability Types of Accounts • Asset Accounts – Normal Balance = Debit • Liability Accounts – Normal Balance = Credit • Equity Accounts – Permanent Equity – Normal Balance – Credit – Temporary Owners Equity • Revenue – Normal Balance = Credit • Expense – Normal Balance = Debit Debit vs Credit • Assets and Expenses have a normal balance of a Debit – To increase the balance Debit – To decrease the balance Credit • Liabilities, Permanent OE and Revenues have a normal balance of a Credit – To increase the balance Credit – To decrease the balance Debit Forms of Business Organizations • • • • • Sole Proprietorship Partnerships Limited Partnerships Limited Liability Companies (LLC) Corporations Sole Proprietorship • • • • Easiest to organize / dissolve Legally not a separate business – liability issues It is separate for accounting purposes, however Owner not paid a salary or wage - withdrawals Partnerships • Two or more people joined together in a non- corporate manner for conducting business. Can use a written or oral agreement Partnerships • Advantages – Greater financial strength – Does not pay taxes – Shares liability – Greater management strength • Disadvantages – Partners are taxed on profits regardless of cash distribution – Limits decision making process – Unlimited legal liability Limited Partnerships • Offers liability protection to limited partners – General Partner(s) – responsible for debts of the partnership – Limited Partner(s) – may not actively participate in the day to day operations of the business – Agreement must be written – Limited partners liability is limited to the amount of their investment Corporations • A legal entity created by • a state or other political authority Characteristics – An exclusive name – Continued existence independent of stockholders – Paid in capital represented by shares of stock – Overall control vested in its directors Corporations • Advantages – Shareholders liability limited to amount of investment – Owners are taxed on distributed profits (dividends) – Employee equity participation (ESOP) – Lower tax rates – Corporation continues on in perpetuity • Disadvantages – Double taxation – Ownership control Other Forms Of Business Organization • S-Corp – Eliminates double taxation – Limited to 75 shareholders – Only one class of stock – Shareholders pay taxes • Limited Liability Company (LLC) – May have unlimited number of owners – May have a single owner – Not restricted to one class of stock Elements of Ethics • Use of Company Assets • Anti-Trust Laws • Relations With Competitors • Relations With Suppliers • Relations With Customers Ethics and Hospitality Accounting • Is the Decision Legal? • Is the Decision Fair? • Does the Decision Hurt Anyone? • Have I Been Honest With Those Affected? Ethics and Hospitality Accounting • Can I Live With My Decision? • Am I Willing to Publicize My Decision? • What If Everyone Did What I Did? Homework • Problems 1,2,3,5