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Financial Accounting. John Wild 3 rd Edition. Information for Decisions. Chapter 1. Accounting in Business. is a system that. information that is. Importance of Accounting. Accounting. Identifies. Records. Relevant. Communicates. Reliable. to help users make better decisions.

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Financial accounting
Financial Accounting

John Wild3rd Edition

Information for Decisions


Chapter 1

Chapter 1

Accounting in Business


Importance of accounting

is a

system that

information

that is

Importance of Accounting

Accounting

Identifies

Records

Relevant

Communicates

Reliable

to help users make better decisions.

Comparable


Accounting activities
Accounting Activities

  • Identifying Business Activities

  • Recording Business Activities

  • Communicating Business Activities


Users of accounting information

Internal Users

External Users

  • Lenders

  • Shareholders

  • Governments

  • Consumer Groups

  • External Auditors

  • Customers

  • Managers

  • Officers

  • Internal Auditors

  • Sales Staff

  • Budget Officers

  • Controllers

Users of Accounting Information


Users of accounting information1

External Users

Financial accountingprovides external users with financial statements.

Users of Accounting Information

Internal Users

Managerial accounting provides information needs for internal decision makers.


Opportunities in accounting

Financial

Managerial

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 planning

  • Lenders

  • Consultants

  • Analysts

  • Traders

  • Directors

  • Underwriters

  • Planners

  • Appraisers

  • FBI investigators

  • Market researchers

  • Systems designers

  • Merger services

  • Business valuation

  • Human services

  • Litigation support

  • Entrepreneurs

Accounting-related

Opportunities in Accounting



Ethics a key concept

Ethics

Ethics—A Key Concept

Beliefs that distinguish right from wrong

Accepted standards of good and bad behavior


Guidelines for ethical decisions
Guidelines for Ethical Decisions

  • Make ethical decision

  • Identify ethical concerns

  • Analyze options

Use personal ethics to recognize ethical concern.

Consider all good and bad consequences.

Choose best option after weighing all consequences.


Generally accepted accounting principles

Relevant Information

Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable Information

Is helpful in contrasting organizations.

Generally Accepted Accounting Principles

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).


Setting accounting principles
Setting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad and specific principles.

The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.


Principles of accounting

Now

Future

Cost Principle

Accounting information is based on actual cost.

Objectivity Principle

Accounting information is supported by independent, unbiased evidence.

Going-Concern Principle

Reflects assumption that the business will continue operating instead of being closed or sold.

Principles of Accounting


Principles of accounting1

  • Revenue Recognition Principle

  • Recognize revenue when it is earned.

  • Proceeds need not be in cash.

  • Measure revenue by cash received plus cash value of items received.

Monetary Unit Principle

Express transactions and events in monetary, or money, units.

Business Entity Principle

A business is accounted for separately from other business entities, including its owner.

Principles of Accounting


Business entity forms

Sole Proprietorship

Partnership

Corporation

Business Entity Forms


Characteristics of businesses

*

*

Characteristics of Businesses

*Proprietorships and partnerships that are set up as LLC’s provide limited liability.


Corporation

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it common stock (or capital stock).

Corporation


Accounting equation

=

+

Assets

Liabilities

Equity

Accounting Equation

Liabilities & Equity

Assets


Assets
Assets

Cash

Accounts Receivable

Notes Receivable

Resources owned or controlled by a company

Vehicles

Land

Buildings

Store Supplies

Equipment


Liabilities
Liabilities

Accounts Payable

Notes Payable

Creditors’ claims on assets

Wages Payable

Taxes Payable


Equity
Equity

Retained Earnings

Contributed Capital

Owner’s

claim on

assets

Dividends


Expanded accounting equation

Assets

Liabilities

Equity

_

_

=

+

Common Stock

Dividends

+

Revenues

Expenses

Retained Earnings

Expanded Accounting Equation


Transaction analysis equation

The accounting equation must remain in balance after each transaction.

=

+

Assets

Liabilities

Equity

Transaction Analysis Equation


Transaction analysis

The accounts involved are:

(1) Cash (asset)

(2) Common Stock (equity)

Transaction Analysis

J. Scott invests $20,000 cash to start the business.


Transaction analysis1
Transaction Analysis

J. Scott invests $20,000 cash to start the business.


Transaction analysis2

The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

Transaction Analysis

Purchased supplies paying $1,000 cash.


Transaction analysis3
Transaction Analysis

Purchased supplies paying $1,000 cash.


Transaction analysis4

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

Transaction Analysis

Purchased equipment for $15,000 cash.


Transaction analysis5
Transaction Analysis

Purchased equipment for $15,000 cash.


Transaction analysis6
Transaction Analysis

The accounts involved are:

(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)

Purchased Supplies of $200 and Equipment of $1,000 on account.


Transaction analysis7
Transaction Analysis

Purchased Supplies of $200 and Equipment of $1,000 on account.


Transaction analysis8
Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Notes payable (liability)

Borrowed $4,000 from 1st American Bank.


Transaction analysis9
Transaction Analysis

Borrowed $4,000 from 1st American Bank.


Transaction analysis10
Transaction Analysis

The balances so far appear below. Note that the Balance Sheet Equation is still in balance.

Now let’s look at transactions involving revenue, expenses and dividends.


Transaction analysis11
Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

Provided consulting services receiving $3,000 cash.


Transaction analysis12
Transaction Analysis

Provided consulting services receiving $3,000 cash.


Transaction analysis13
Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Salaries expense (equity)

Paid salaries of $800 to employees.

Remember that the balance in the salaries expense account actually increases.

But, equity decreases because expenses reduce equity.


Transaction analysis14
Transaction Analysis

Paid salaries of $800 to employees.

Remember that expensesdecreaseequity.


Transaction analysis15
Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Dividends (equity)

Dividends of $500 are paid to shareholders.

Remember that the Dividend account actually increases.

But, equity decreases because dividends reduce equity.


Transaction analysis16
Transaction Analysis

Dividends of $500 are paid to shareholders.

Remember that withdrawalsdecreaseequity.


Financial statements
Financial Statements

Let’s prepare the Financial Statements reflecting the transactions we have recorded.

  • Income Statement

  • Statement of Retained Earnings

  • Balance Sheet

  • Statement of Cash Flows


Income statement
Income Statement

Net income is the difference between Revenues and Expenses.

Theincome statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.


Statement of retained earnings
Statement of Retained Earnings

The net income of $2,200 increases Retained Earnings by $2,200.


Balance sheet
Balance Sheet

TheBalance Sheetdescribes a company’s financial position at a point in time.



Return on assets roa

Return onassets

Net incomeAverage total assets

=

Return on Assets (ROA)

ROA is viewed as an indicator of operating efficiency.



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