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Chapter 1. Introduction to Accounting and Business. Financial and Managerial Accounting 8th Edition Warren Reeve Fess. Objectives. 1. Describe the nature of a business. 2. Describe the role of accounting in business.

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Chapter 1

Introduction to Accounting and Business

Financial and Managerial Accounting

8th Edition

Warren Reeve Fess


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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 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.


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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


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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


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Product

Disney Entertainment

Delta Air Lines Transportation

Marriott Hotels Hospitality and lodging

Merrill Lynch Financial advice

Sprint Telecommunication

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.

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.


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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 stakeholders’ needs.

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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Profession of Accounting stakeholders’ needs.

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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The stakeholders’ needs.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 stakeholders’ needs.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 stakeholders’ needs.

Assets = Liabilities + Owners’ Equity

The resources owned by a business


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The Accounting Equation stakeholders’ needs.

Assets = Liabilities + Owners’ Equity

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


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The Accounting Equation stakeholders’ needs.

Assets = Liabilities + Owners’ Equity

The rights of the owners


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What is a business transaction? stakeholders’ needs.

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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Assets that will be known as

Owners’ Equity

=

Cash

25,000

Capital Stock

25,000 Investment by stockholder

=

a.

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.


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Bal. that will be known as 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


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= that will be known as

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


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Bal. that will be known as 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


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Expenses that will be known as

=

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


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Bal. that will be known as 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


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Bal. that will be known as 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


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Bal. that will be known as 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


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Increased by that will be known as

Stockholders’ investments

+

Effects of Transactions on Owners’ Equity

Capital Stock


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Decreased by that will be known as

Decreased by

Increased by

Revenues

Expenses

Dividends

+

Effects of Transactions on Owners’ Equity

Retained Earnings


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Accounting reports, called that will be known as financial statements, provide summarized information to the users.


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Financial Statements that will be known as

  • 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.


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NetSolutions that will be known as

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


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NetSolutions that will be known as

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


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NetSolutions that will be known as

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


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NetSolutions that will be known as

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


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Statement of Cash Flows that will be known as

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.