Transcript Document

Chap 1
C1
Importance of Accounting
is a
Accounting
system that
Identifies
Records
GAAP
Relevant
information
that is
Communicates
Reliable
Comparable
to help users make
better decisions.
1-2
C2
Users of Accounting
Information
Internal Users
External Users
•Lenders
•Consumer Groups
•Shareholders •External Auditors
•Governments •Customers
Should I lend this business money?
Invest? Purchase Products?
•Managers
•Sales Staff
•Officers
•Budget Officers
•Internal Auditors•Controllers
How can I make the best business
decisions?
1-3
C3
Opportunities in Accounting
Financial -1a
Managerial -1b
Taxation
*Preparation
•Analysis
•Auditing
•Regulatory
•Consulting
•Planning
•Criminal
investigation
•General accounting
•Cost accounting
•Budgeting
•Internal auditing
•Consulting
•Controller
•Treasurer
•Strategy
•Preparation
•Planning
•Regulatory
•Investigations
•Consulting
•Enforcement
•Legal services
•Estate plans
Accountingrelated
•Lenders
•Consultants
•Analysts
•Traders
•Directors
•Underwriters
•Planners
•Appraisers
•FBI investigators
•Market researchers
•Systems designers
•Merger services
•Business valuation
•Forensic accountant
•Litigation support
•Entrepreneurs
1-4
Accounting Salaries
Field
Title
2013 Salary
Public Accounting
Audit Staff (0-2 yrs)
$ 53,000
Audit Senior (3-5 yrs)
$ 72,000
Audit Manager (6-8 yrs)
$ 95,000
Audit Manager (11 yrs)
$165,000
Audit Partner (15 yrs)
$450,000
Corp Accountant (0-2 yrs)
$ 48,000
Fin’l Rptg Mgr (6-8 yrs)
$ 96,000
Director of Acctg (6+ yrs)
$113,000
Corp Controller (8+ yrs)
$136,000
Gen’l Ledger Acct
$ 53,000
Payroll Acct
$ 49,000
Accts Pay Clerk
$15-20/hr
Private Accounting
Recordkeeping
*Taken from Indeed.com & goingconcern.com
Setting Accounting Rules
U.S.
Rule Maker
Rules
Global
FASB (Fin’l Acctg Stds
IASB (Int’l Acctg Stds Board
Board) issues broad & specific
US accounting principles.
) issues preferred
accounting practices in other
countries.
GAAP (Generally Accepted
IFRS (Int’l Financial
Accounting Principles)
Reporting Standards)
Police/Enforcers
SEC (Securities & Exchange IFRS not enforceable
Commission)
BUT recommended.
US Reqm’ts
US GAAP req’d for US
SEC Registrants
IFRS or GAAP for nonUS SEC Registrants
It seems unlikely that IFRS will be mandated soon given the new SEC
Chairman’s focus on investor protections & securities law enforcement.
However US GAAP & IFRS accounting standards continue to converge SO US
companies are being impacted by IFRS. (Apr 2013)
C5
Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP = Rulebook).
RELEVANT
Information
Affects the decision of
its users.
RELIABLE
Information
Is trusted by
users.
COMPARABLE
Information
Used in comparisons
across years & companies.
1-7
Technology & Accounting
• Reduces time, effort & cost of recording
business transactions.
• Improves clerical accuracy (I.e. addition,
subtraction, etc.)
• Frees time & labor dollars for selling more
products or making better
business decisions.
C4
Ethics—A Key Concept
Ethics
Beliefs that
distinguish
right from
wrong
Accepted
standards of
good and bad
behavior
1-9
C4
Guidelines for Ethical
Decisions
 Identify
ethical concerns
Use personal
ethics to
recognize ethical
concern.
 Analyze
options
Consider all good
and bad
consequences.
 Make ethical
decision
Choose best
option after
weighing all
consequences.
1-10
C5
Principles of Accounting
Cost principle means that
accounting information is based
on actual cost.
Going-concern means that
accounting information reflects a
presumption the business will
continue operating.
Monetary unit means we can
express transactions in money.
Revenue Recognition means
revenue is recorded only when
the earning process is completed.
Revenue recognition principle
provides guidance on when a
company must recognize
revenue.
Business entity means that a
business is accounted for
separately from its owner or other
business entities.
Matching Principle prescribes that
a company must record its
expenses incurred to generate the
revenue.
Full disclosure principle requires a company to report the details behind
financial statements that would impact users’ decisions.
1-11
C5
Business Entity Forms
Sole
Proprietorship
Partnership
Corporation
Advantages: Ease &
Low Cost to Organize
Disadvantage: Limited
Fin’l Resources &
Unlimited Liability
Usually organized as a
LLC to reduce liability
exposure.
Advantages: More fin’l &
mgmt resources
Disadvantage: Unlimited
Liability
Usually organized as a
LLC to reduce liability
exposure.
Advantages: Access to
large capital thru stocks.
Unlimited fin’l
resources.
Disadvantage: Double
Taxation.
1-12
Accounting Equation
A1
Assets
=
Liabilities
Assets
+
Equity
Liabilities
& Equity
1-13
A1
Assets - OWN of value
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Resources
owned or
controlled
by a
company
Notes
Receivable
Land
Buildings
Equipment
1-14
A1
Liabilities - What you OWE
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
Wages
Payable
1-15
Equity
A1
Contributed
Capital
Retained
Earnings
(Investments)
(Revenues/Expenses)
Owner’s
claim on
assets
Dividends
1-16
Go over Ex 1-9 & 1-8
Expanded Accounting
Equation
A1
Assets
Assets
Common
Stock*
=
=
_
•Increases Equity
** Decreases Equity
Liabilities
Liabilities
Dividends**
+
+
+
Revenues*
Equity
Equity
_Expenses**
Retained Earnings
1-18
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.
Analyzing Business Transactions
1. Read the transaction. Decide which accounts
are involved. Look first to see if cash is
involved.
2. Decide if the accounts increase or decrease in
value.
3. Classify the accounts involved (asset, liability,
equity/capital, revenue, or expense).
4. After recording the transaction does:
Assets = Liabilities + Owners’ Equity
Revenues
Monies earned by a business -Fees earned for services rendered (I.e. accounting, legal)
Income for selling merchandise (I.e. department store)
Rental Income
Interest income for lending money
Revenues INCREASE Owners’ Equity
Expenses
Costs incurred to generate revenues -Salaries & Wages
Materials
Rent
Advertising & marketing
Interest for borrowed monies
Expenses DECREASE Owners’ Equity
Dividends
Distribution of assets to its
stockholders. Generally represents
a distribution of earnings back to the
stockholders
Dividends DECREASE Owners’ Equity
P1
Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows (to be
discussed in Ch 12)
1-24
P1
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2012
Revenues:
Consulting revenue
$ 5,800
Rental revenue
300
Total revenues
$ 6,100
Expenses:
Salaries expense
1,400
Rent Expense
1,000
Utilities Expense
230
Total expenses
2,630
Net income
$ 3,470
Net
income is
the
difference
between
Revenues
&
Expenses
The income statement tells us whether the
company was profitable over a period of time.
Were revenues greater than expenses?
1-25
P1
Statement of Retained Earnings
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2012
Balance, 12/1/12
$
Net income for December
Less: Dividends
Balance, 12/31/12
FASTFORWARD
Income Statement
For the Month Ended December 31, 2012
Revenues:
Consulting revenue
$
5,800
Rental revenue
300
Total revenues
$
Expenses:
Rent expense
1,000
Salaries expense
1,400
Utilities expense
230
Total expenses
Net income
$
$
6,100
2,630
3,470
3,470
3,470
(200)
3,270
Net income
of $3,470
increases
Retained
Earnings by
$3,470.
1-26
P1
Balance Sheet
The Balance Sheet describes a company’s financial position at a
point in time. It is the only Financial Statement for a point in time (I.e.
Dec. 31, 2012)
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2012
Balance, 12/1/12
$
Net income for December
Less: Dividends
Balance, 12/31/12
$
3,470
3,470
200
3,270
FASTFORWARD
Balance Sheet
December 31, 2012
Assets
Cash
Supplies
Prepaid insurance
Equipment
Total assets
Liabilities
Accounts payable
Unearned revenue
Total liabilities
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity
$
4,350
9,720
2,400
26,000
$ 42,470
$
6,200
3,000
9,200
30,000
3,270
33,270
$ 42,470
1-27
A3
Return on Assets (ROA)
Return
on
assets
Net income
=
Average total assets
ROA is viewed as an
indicator of operating
efficiency.
1-28
Go over BTN 1-2
Slides 31-39 for reference only
We will NOT be covering these worksheets in class.
A2
Transaction Analysis
J. Scott invests $20,000 cash to start the
business in return for stock.
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilities + Equity?
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
$ 20,000 $
-
$ 20,000
$
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-31
A2
Purchased supplies paying $1,000 cash.
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilities + Equity?
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
$ 19,000 $
1,000 $
$ 20,000
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-32
A2
Purchased equipment for $15,000 cash.
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
$
4,000 $ 1,000 $
$ 20,000
15,000
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-33
Purchased Supplies of $200 and
Equipment of $1,000 on account.
A2
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
$
4,000 $ 1,200 $
$ 21,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 20,000
$ 1,200
16,000
$ 1,200 $
=
$
-
$ 20,000
21,200
1-34
A2
Borrowed $4,000 from 1st American Bank.
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
(5)
4,000
$ 8,000 $ 1,200 $ 16,000
$ 25,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 20,000
$ 1,200
=
$
$ 1,200 $
4,000
4,000
$
25,200
$ 20,000
1-35
A2
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
$ 8,000 $ 1,200 $
$ 25,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
$ 20,000
$
$ 20,000
1,200 $
4,000
$ 25,200
1-36
A2
1)
2)
3)
Provided consulting services receiving
$3,000 cash.
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
$ 11,000 $
1,200 $
$ 28,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
Revenue
$ 20,000
$ 3,000
$ 1,200 $
$ 20,000 $ 3,000
4,000
$ 28,200
1-37
Paid salaries of $800 to employees.
A2
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
$ 10,200 $
1,200 $
$ 27,400
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$ 1,200 $
$ 20,000 $ 3,000 $
4,000
(800)
$ 27,400
Remember that expenses decrease equity.
1-38
A2
Dividends of $500 are paid to shareholders
1)
2)
3)
Is Cash Involved? If yes, is cash increased or decreased?
What other account(s) are involved? Does their value increase or decrease?
Does Assets = Liabilites + Equity?
Assets
Cash
Bal. $
(6)
(7)
(8)
$
=
Supplies Equipment
8,000 $
3,000
(800)
(500)
9,700 $
1,200
$
16,000
Liabilities
+
Equity
Accounts
Notes
Payable Payable
Common
Stock
$ 1,200
$ 20,000
$
4,000
Dividends
Revenue
$
1,200
$ 26,900
$
16,000
$ 1,200
=
$
4,000
$ 20,000
$
$
(500)
(500) $
Expenses
3,000
3,000
$
(800)
$
(800)
$ 26,900
Remember that dividends decrease equity.
1-39