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Chapter 1 Accounting and The Business Environment. Decision Makers. Two Fields of Accounting. Financial Accounting. Managerial Accounting. Focuses on information for internal decision makers Managers Business Owners Employees. Provides information for external decision makers Investors

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Presentation Transcript
slide1

Chapter 1

Accounting and The Business Environment

two fields of accounting
Two Fields of Accounting

Financial Accounting

Managerial Accounting

Focuses on information for internal decision makers

Managers

Business Owners

Employees

Provides information for external decision makers

  • Investors
  • Creditors
  • Taxing Authorities
slide4
S1-2: USERS OF FINANCIAL INFORMATION

Suppose you are the manager of Greg’s Tunes, Inc. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s stockholders’ equity.

Requirements:

  • Is the banker considered an internal or external user of financial information?
  • Which financial statement would provide the best information to answer the banker’s questions?
the accounting profession
The Accounting Profession
  • Lucrative career with many opportunities
  • Certified Public Accountants (CPAs)
audit
Audit
  • SEC requires companies to have financial statements examined by independent accountants
    • Auditors will provide an opinion on financial statements, if possible
  • Recent accounting scandals hurt investor confidence
    • SOX
    • PCAOB
organization of a corporation
Organization of a Corporation
  • Incorporators obtain charter from the state
  • Charter authorizes corporation to:
    • Issue stock
    • Conduct business in accordance with state law
  • Incorporators agreed to a set of bylaws
  • Corporations begins to exist when stock is issued
slide17
S1-4: TYPES OF BUSINESS ORGANIZATION

Chloe Michaels plans on opening Chloe Michaels’ Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Chloe wants the option to raise additional equity easily in the future. Which type of business organization will meet Chloe’s needs best?

slide18
GAAP
  • Generally Accepted Accounting Principles
    • Guidelines that govern accounting
    • Based on a conceptual framework
the accounting equation
The Accounting Equation

ASSETS

LIABILITIES

EQUITY

Economic

Resources

Claims to Economic

Resources

assets
Assets
  • Economic resources
  • Benefit the business in the future
claims to assets
Claims to Assets

Liabilities

Equity

Owners’ claims to the assets of the business

  • Debts payable to outsiders
the accounting equation1
The Accounting Equation

Assets

Liabilities

Equity

Assets

Liabilities

Equity

equity of a corporation
Equity of a Corporation

Liabilities

Assets

Stockholders’equity

Paid-in capital

Retained earnings

net income
Net Income

+ Net income(loss)

+ Revenues

- Expenses

Retained earnings

- Dividends

revenues
Revenues
  • Amounts earned by delivering goods or services to customers
    • Sales revenue
    • Service revenue
    • Interest revenue
    • Dividend revenue
expenses
Expenses
  • Outflows of assets or increasing liabilities in the course of delivering goods or services to customers
    • Store or rent expense
    • Salary expense
    • Advertising expense
    • Utilities expense
    • Interest expense
    • Property tax expense
slide31
E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE ACCOUNTING EQUATION

Select financial information for three corporations follows:

Requirements:

1. Compute the missing amount in the accounting equation for each entity.

$74,000

$ ?

$43,000

$ ?

$47,000

$ ?

e1 16 continued
E1-16: CONTINUED

2. List the seven main characteristics of a corporation.

3. Which accounting concept tells us that the previous three corporations will continue to exist in the future?

Continuous Life and transferability

Corporate taxation

Government regulation

Limited Liability of Stockholders

No Mutual Agency

Separate Legal Entity

Separation of ownership and managers

Going Concern Concept

transaction
Transaction
  • An event that affects the financial position of the business
  • Can be measured reliably
  • Every transaction impacts at least two items
  • The accounting equation balances before and after each transaction
e1 21 using the accounting equation to analyze transactions

Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events:

  • Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C.
E1-21: USING THE ACCOUNTING EQUATION TO ANALYZE TRANSACTIONS
preparing the financial statements

Balance Sheet

Statement of Retained Earnings

Income Statement

Preparing the Financial Statements

Statement of Cash Flows

p1 36a preparing financial statements
P1-36A: PREPARING FINANCIAL STATEMENTS

Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, 2011. At December 31, 2012, the business’s accounting records show these balances:

Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012:

a. Income statement

b. Statement of retained earnings

c. Balance sheet

p1 36a continued1
P1-36A: CONTINUED

47,000

76,000