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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.
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 corporation and explain how they interrelate. 9. Use the ratio of liabilities to stockholders’ equity to analyze the ability of a business to withstand poor business conditions.
Product General Motors Cars, trucks, vans Intel Computer chips Boeing Jet aircraft Nike Athletic shoes and apparel Coca-Cola Beverages Sony Stereos and television Types of Businesses Manufacturing Business
Product Wal-Mart General merchandise Toys “R” Us Toys Circuit City Consumer electronics Lands’ End Apparel Amazon.com Internet books, music, video retailer Types of Businesses Merchandising Business
Product Disney Entertainment Delta Air Lines Transportation Marriott Hotels Hospitality and lodging Merrill Lynch Financial advice Sprint Telecommunication Types of Businesses Service Business
There are three types of business organizations • Proprietorship • Partnership • Corporation
A proprietorshipis owned by one individual. • Advantages • Ease in organizing • Low cost of organizing • Disadvantage • Limited source of financial resources • Unlimited liability Joe’s
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
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.
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.
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
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
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
Business Stakeholders A business stakeholderis a person orentity having an interest in the economic performance of the business.
STAKEHOLDERS External: Customers, creditors, government Internal: Owners, managers, employees Identify stake-holders. 1 Assess stakeholders’ informational needs. 2 The Process of Providing Information
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
STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Prepare accounting reports for stakeholders. 5 The Process of Providing Information Accounting Information System
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
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.
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.
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.
The Accounting Equation Assets = Liabilities + Owners’ Equity The resources owned by a business
The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the creditors, which represent debts of the business
The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the owners
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.
On November 1, 2008, Saeed Ajmal organized a corporation that will be known as NetSolutions.
Assets Owners’ Equity = Cash 25,000 Capital Stock 25,000 Investment by stockholder = a. a. Saeed Ajmal deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.
Bal. 5,000 20,000 25,000 b. NetSolutions exchanged $20,000 for land. Assets Owners’ Equity = Capital Stock 25,000 Cash + Land 25,000 Bal. = b.–20,000 +20,000
= Bal. 5,000 1,350 20,000 1,350 25,000 c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owners’ Liabilities + Equity Assets = Accounts Capital Cash + Supplies + Land Payable Stock Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350
Bal. 12,500 1,350 20,000 1,350 25,000 7,500 Fees earned d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 5,000 1,350 20,000 1,350 25,000 = d. + 7,500 + 7,500
Expenses = Bal. 8,850 1,350 20,000 1,350 25,000 3,850 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 12,500 1,350 20,000 1,350 25,000 7,500 e.– 3,650 –2,125 – 800 – 450 – 275
Bal. 7,900 1,350 20,000 400 25,000 3,850 f. NetSolutions paid $950 to creditors during the month. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings = Bal. 8,850 1,350 20,000 1,350 25,000 3,850 f.– 950 – 950
Bal. 7,900 550 20,000 400 25,000 3,050 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 7,900 1,350 20,000 400 25,000 3,850 = Supplies Expense g.– 800 – 800
Bal. 5,900 550 20,000 400 25,000 1,050 h. At the end of the month, NetSolutions pays $2,000 to stockholders. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 7,900 550 20,000 400 25,000 3,050 = = h.–2,000 –2,000 Dividends
Increased by Stockholders’ investments + Effects of Transactions on Owners’ Equity Capital Stock
Decreased by Decreased by Increased by Revenues Expenses Dividends + – – Effects of Transactions on Owners’ Equity Retained Earnings
Accounting reports, called financial statements, provide summarized information to the users.
Financial Statements • Income statement—A summary of the revenue and expenses for a specific period of time. • Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time. • Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date. • Statement of cash flows—A summary of the cash receipts and disbursements for a specificperiod of time.
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 Transfer this amount to the retained earnings statement. Total operating expenses 4 450 00 Net income $3 050 00
NetSolutions Retained Earnings Statement For the Month Ended November 30, 2005 Net income for November $3 050 00 Less dividends 2 000 00 Retained earnings, November 30, 2005 $1 050 00 From the income statement Transferred to the balance sheet
NetSolutions Balance Sheet November 30, 2005 From the retained earnings statement Assets Liabilities Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Stockholders’ Equity Land 20 000 00 Capital Stock $25,000 Ret. Earnings l,050 26 050 00 Total liabilities and Total assets $26 450 00 stockholder’s equity $26 450 00 This balance sheet presented using the accountform
When the balance sheet displays the liabilities and stockholders’ equity below the assets, the reportform is being used.
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 creditors 4 600 00 Net cash flow from operating activities 2 900 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 owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00 ) Should match Cash on the balance sheet
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.
Ratio of liabilities to stockholders’ equity Total Liabilities Total stockholders’ equity = Financial Analysis and Interpretation The ratio of liabilities to stockholders’ equity allows bankers, creditors, and other stakeholders a means of analyzing the corporation’s ability to withstand poor business conditions.
Ratio of liabilities to stockholders’ equity $400 $26,050 = Ratio of liabilities to stockholders’ equity 0.015 = Financial Analysis and Interpretation
ATTENTION COMMERCE STUDENTS ACCOUNTING(FINANCIAL & COST) OFICMAP STAGE 1,2,3,4 (CRASH CLASSES)CA..MODULE B,C,D..Fresh Groups & Individuals Of CA Mod B.. Financial AccountingPIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3BBA,MBAB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSKHALID AZIZ….. 0322-3385752..kARACHIhttp://finance.groups.yahoo.com/group/cost-accountants