A CCOUNTING A ND I TS U SE I N B USINESS D ECISIONS

1. CHAPTER 1 ACCOUNTINGAND ITS USE IN BUSINESS DECISIONS [After listening to the lecture comments for this slide, click anywhere on the slide to continue.]

2. Pyramid Inverted The Body of Accounting Knowledge [For all slides, click anywhere on the slide to continue.]

3. Pyramid Inverted Chapter 1 The Body of Accounting Knowledge

4. The Business Entity Concept For accounting purposes, each business organization, or entity, has an existence separate from its owner(s).

5. Forms of Businesses Single Proprietorship Partnership Corporation

6. Single Proprietorships • One owner - the simplest possible form of business

7. Single Proprietorships • One owner - the simplest possible form of business • Is not considered a separate legal entity.

8. Single Proprietorships • One owner - the simplest possible form of business • Is not considered a separate legal entity. • Many other textbooks start with this form and then move on to corporations.

9. Partnerships • Two or more owners • Also not considered a separate legal entity. • Are not covered in this course. • Advanced accounting

10. Owners Corporations • Usually there are many owners. • Usually the owners do not exercise direct control over the company.

11. Board of Directors Owners Corporations • Usually there are many owners. • Usually the owners do not exercise direct control over the company. • The owners’ interests are represented by theboard of directors.

12. Board of Directors Owners Corporations • Usually there are many owners. • Usually the owners do not exercise direct control over the company. • The owners’ interests are represented by theboard of directors. • Reason used throughout this text.

13. Owners Corporations • A corporation is considered a separate legal entity. • pays taxes, can sue and be sued, and is subject to legal penalties. • More on this in Chapter 12. • Stockholders get dividends from the corporation. • What are dividends? Distributions of profits to owners

14. Service Businesses (Chapters 1-4) Merchandising Businesses (Chapters 16-17) Manufacturing Businesses (Last 2/3 of 2nd semester) Three Types of Businesses Examples of each?

15. Terminology • Profitability: The ability to generate income. • Solvency: The ability to pay debts as they become due. • Why are they important? Ostensibly, they are the primary objectives of every business

16. Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows The Four Basic Financial Statements Which two are the most important?

17. Why are Income Statement and Balance Sheet most important? • Because they communicate the profitability and solvency. • Which does which? Income Statement - Profitability Balance Sheet - Solvency • Can each be represented with an equation?

18. Net Income = Revenues - Expenses Inflows of assets resulting from the sale of products or services. Income Statement Model

19. Net Income = Revenues - Expenses Costs incurred to produce revenues or, Assets used up in the process of earning revenues. Income Statement Model

20. Net Income = Revenues - Expenses NET INCOME results when Revenues exceed Expenses for a given period. Income Statement Model Caution! Must use the correct accounting definitions! Not yours, not Webster’s and not one from Economics class.

21. Net Loss = Revenues - Expenses NET LOSS results when Expenses exceed Revenues for a given period. Income Statement Model

22. Liabilities Stockholders’ Equity Balance Sheet Model Assets

23. Things of value owned by the business. Debts owed by the business. (i.e., the creditors’ claims against the assets) Owners’ interest in the business. (i.e., the owners’ claims against the assets) Balance Sheet Model Assets = Liabilities + Stockholders’ Equity

24. Components of Stockholders’ Equity • Capital stock • Amount the owners have invested in the corporation. • Retained earnings • Net income earned since the beginning of the company, less any dividends paid.

25. + Balance Sheet Model Assets = Liabilities + Stockholders’ Equity Retained Earnings Capital Stock - Net Income Dividends

26. Balance Sheet Model _____Sources of assets_____ Assets = Liabilities + Stockholders’ Equity Why is it called a “Balance Sheet”? Basic algebra

27. Balance Sheet Model Equities (Claims against the assets) Assets = Liabilities + Stockholders’ Equity Note, however, that you cannot “tag a dollar”!

28. Balance Sheet: At 12-31 1998 1-1 12-31 Income Statement: For the year ended 12-31 Timing of Balance Sheet and Income Statement

29. Financial Statements Covered This Semester • Income Statement • Statement of Retained Earnings • Simple example • Balance Sheet • Two types • Horizontal and vertical 19

30. Statement of Retained Earnings • Links the Income Statement with the Balance Sheet • Summarizes changes in Retained Earnings (R/E) for the period

31. Statement of Retained Earnings:More Complex Example (p. 20) HEADING R/E - Beginning of Period $ $$$ Add: Net Income for for the Period $$$ Subtract: Dividends for the Period $$$ R/E - End of Period $ $$$

32. Retained Earnings Model B/R/E + NI - Dividends = E/R/E

33. Retained Earnings Model B/R/E + NI - Dividends = E/R/E This assumes that the company in fact has net income.

34. Retained Earnings Model B/R/E - NL - Dividends = E/R/E If the company does not have net income, subtract the net loss.

35. Retained Earnings Model B/R/E + NI - Dividends = E/R/E Adividendis a distribution of income to the owners of the corporation.

36. The Financial StatementNOT Studied This Semester • Statement of Cash Flows • At this point, simply know that it tells where cash came from and where it went. • “Where got, where gone”

37. Balance Sheet ComparisonCorporation vs. Proprietorship (See Appendix, pp. 33-34) CORPORATIONPROPRIETORSHIP Stockholders' Equity: Owner's Equity: Capital stock $ 100,000 Smith, Capital $150,000 Retained earnings 50,000 ______ Total equity $150,000 Total equity $ 150,000

38. ROLL ‘EM ! Video #1 Video #2

39. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now

40. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-30 Transactions?

41. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-28 Transactions? • P. 26 - Subsequent use of Summary of Transactions in this course

42. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-28 Transactions? • P. 26 - Subsequent use of Summary of Transactions in this course • P. 27 - Transaction 1b - Why...?

43. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-28 Transactions? • P. 26 - Subsequent use of Summary of Transactions in this course • P. 27 - Transaction 1b - Why...? • P. 27 - Transaction 2b - Revenue?

44. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-28 Transactions? • P. 26 - Subsequent use of Summary of Transactions in this course • P. 27 - Transaction 1b - Why...? • P. 27 - Transaction 2b - Revenue? • P. 30 - One more transaction

45. Final Points • P. 23 “Underlying Assumptions” • Only know business entity concept for now • Don’t read the chapters! Questions on pp. 23-28 Transactions? • P. 26 - Subsequent use of Summary of Transactions in this course • P. 27 - Transaction 1b - Why...? • P. 27 - Transaction 2b - Revenue? • P. 30 - One more transaction • P. 31 - Analyzing and Using Fin. Results

46. Caution! One final caution, especially for those who have had some prior accounting • High School • One course • Two courses • College • Took it and dropped the course • Took it and failed the course

47. That’s the end of the topic, Bub! Did you get all that?