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© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. . Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 1. Introduction to Accounting and Business. Accounting, 21 st Edition

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Chapter 1

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© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Chapter 1

Introduction to Accounting and Business

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University


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Some of the action has been automated, so click the mouse when you see this lighting bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

Like right now.


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Objectives

1.Describe the nature of a business.

2.Describe the role of accounting in business.

3.Describe the importance of business ethics and the basic principles of proper ethical conduct.

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.

After studying this chapter, you should be able to:


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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.


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Product

General MotorsCars, trucks, vans

IntelComputer chips

BoeingJet aircraft

NikeAthletic shoes and apparel

Coca-ColaBeverages

SonyStereos and television

Types of Businesses

Manufacturing Business


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Product

Wal-MartGeneral merchandise

Toys “R” UsToys

Circuit CityConsumer electronics

Lands’ EndApparel

Amazon.comInternet books, music, video retailer

Types of Businesses

Merchandising Business


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Product

DisneyEntertainment

Delta Air LinesTransportation

Marriott HotelsHospitality and lodging

Merrill LynchFinancial advice

SprintTelecommunication

Types of Businesses

Service Business


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There are three types of business organizations

  • Proprietorship

  • Partnership

  • Corporation


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A proprietorshipis owned by one individual.

  • Advantages

  • Ease in organizing

  • Low cost of organizing

  • Disadvantage

  • Limited source of financial resources

  • Unlimited liability

Joe’s


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  • Advantages

  • More financial resources than a proprietorship.

  • Additional management skills.

A partnership is owned by two or more individuals.

  • Disadvantage

  • Unlimited liability.

Joe and Marty’s


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A corporation is organized under state or federal statutes as a separate legal entity.

  • Advantage

  • The ability to obtain large amounts of resources by issuing stocks.

  • Disadvantage

  • Double taxation.

J & M, Inc.


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Business Strategies

Abusiness 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.


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Business Strategies

Under alow-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


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Business Strategies

Under adifferential 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


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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


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Business Stakeholders

A business stakeholderis a person orentity having an interest in the economic performance of the business.


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STAKEHOLDERS

External: Customers, creditors, government

Internal:

Owners, managers, employees

Identify stake-holders.

1

Assess stakeholders’ informational needs.

2

The Process of Providing Information


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Design the accounting information system to meet stakeholders’ needs.

Record economic data about business activities and events.

3

4

The Process of Providing Information

Accounting Information System


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STAKEHOLDERS

Internal:

Owners, managers, employees

External: Customers, creditors, government

Prepare accounting reports for stakeholders.

5

The Process of Providing Information

Accounting Information System


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Business Ethics

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.

Sound Principles that form the foundation for ethical behavior


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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.


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Generally Accepted Accounting Principles (GAAP)


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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.


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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.


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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources owned by a business


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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the creditors, which represent debts of the business


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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the owners


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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.


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On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.


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Assets

Owner’s Equity

=

Chris Clark, Capital

25,000Investment by Chris Clark

Cash

25,000

=

a.

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.


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Bal. 5,00020,00025,000

b. NetSolutions exchanged $20,000 for land.

Assets

Owner’s Equity

=

Chris Clark, Capital

25,000

Cash + Land

25,000

Bal.

=

b. –20,000+20,000


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Bal.5,0001,35020,0001,35025,000

c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

=

Bal.5,00020,00025,000

c. + 1,350+ 1,350


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Bal.12,5001,35020,0001,35032,500

d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

Bal.5,0001,35020,0001,35025,000

=

Fees earned

d.+ 7,500+ 7,500


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e. – 3,650–2,125

– 800

– 450

– 275

Wages

Rent

Util.

Misc.

  • Bal.8,8501,35020,0001,35028,850

e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

Bal.12,5001,35020,0001,35032,500

=


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Bal.7,9001,35020,00040028,850

f. NetSolutions paid $950 to creditors during the month.

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

=

Bal.8,8501,35020,0001,35028,850

f. – 950– 950


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Bal.7,90055020,00040028,050

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

=

Bal.7,9001,35020,00040028,850

Supplies expense

g. – 800– 800


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Bal.5,90055020,00040026,050

h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.

Owner’s

Liabilities + Equity

Assets

=

Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

=

Bal.7,90055020,00040028,050

With-drawal

h. –2,000–2,000


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Decreased by

Increased by

Owner’s withdrawals

Expenses

Owner’s investments

Revenues

Net income

Effects of Transactions on Owner’s Equity

Owner’s Equity


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Accounting reports, called financial statements, provide summarized information to the owner.


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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.


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NetSolutions

Income Statement

For the Month Ended November 30, 2005

Fees earned

$7 500 00

Operating expenses:

Wages expense

$2 125 00

Rent expense

800 00

Supplies expense

800 00

Utilities expense

450 00

Miscellaneous expense

275 00

Total operating expenses

1 135 00

To the statement of owner’s equity

Net income$3 050 00


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Investment on November 1$25 000 00

Net income for November3 050 00

$28 050 00

NetSolutions

Statement of Owner’s Equity

For the Month Ended November 30, 2005

Chris Clark, capital, November 1, 2005

$ 0

From the income statement

Less withdrawals 2 000 00

Increase in owner’s equity26 050 00

Chris Clark, capital, November 30, 2005$26 050 00

To the balance sheet


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NetSolutions

Balance Sheet

November 30, 2005

From the statement of owner’s equity

Assets Liabilities

Cash$ 5 900 00Accounts Payable$ 400 00

Supplies550 00 Owner’s Equity

Land20 000 00Chris Clark, cap.26 050 00

Total liabilities and

Total assets$26 450 00 owner’s equity$26 450 00

This balance sheet presented using the accountform


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When the balance sheet displays the liabilities and owner’s equity below the assets, the reportform is being used.


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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 creditors4 600 00

Net cash flow from operating activities2 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 owner2 000 00

Net cash flow from financing activities23 000 00

Net cash flow and Nov. 30, 2005 cash bal.$ 5 900 00

)

Should match Cash on the balance sheet


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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.


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Total Liabilities

Total owner’s equity (or total stockholders’ equity)

Ratio of liabilities to owner’s equity

=

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.


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Ratio of liabilities to owner’s equity

$400

$26,050

=

Ratio of liabilities to owner’s equity

0.015

=

Tools for Financial Analysis and Interpretation


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Chapter 1

The End


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