Accounting in Business Chapter 1 Wild and Shaw

Accounting in Business Chapter 1 Wild and Shaw Financial and Managerial Accounting 8 th Edition © 2019 Mc. Graw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of Mc. Graw-Hill Education.

Chapter 1 Learning Objectives CONCEPTUAL C 1 Explain the purpose and importance of accounting. C 2 Identify users and uses of, and opportunities in, accounting. C 3 Explain why ethics are crucial to accounting. C 4 Explain generally accepted accounting principles and define and apply several accounting principles. C 5 Appendix 1 B Identify and describe three major activities of organizations. ANALYTICAL A 1 Define and interpret the accounting equation and each of its components. A 2 Compute and interpret return on assets. A 3 Appendix 1 A—Explain the relation between return and risk. PROCEDURAL P 1 Analyze business transactions using the accounting equation. P 2 Identify and prepare basic financial statements and explain how they interrelate. © Mc. Graw-Hill Education. 2

Learning Objective C 1 Explain the purpose and importance of accounting. © Mc. Graw-Hill Education. 3

Importance of Accounting Exhibit 1. 1 For example, the sale by Apple of an i. Phone. Keep a chronological log of transactions. Prepare reports such as financial statements. Accounting is an information and measurement system that identifies, records, and communicates an organization’s business activities. Access the text alternative for slide images. Learning Objective C 1: Explain the purpose and importance of accounting. © Mc. Graw-Hill Education. 4

Learning Objective C 2 Identify users and uses of, and opportunities in, accounting. © Mc. Graw-Hill Education. 5

Users of Accounting Information Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Accounting serves many users who can be divided into two groups: external users and internal users. • • • Lenders. External auditors. Shareholders. Board of directors. Regulators. • • • Research and development managers. Purchasing managers. Human resource managers. Marketing managers. Production managers. Learning Objective C 2: Identify users and uses of, and opportunities in, accounting. © Mc. Graw-Hill Education. 6

Opportunities in Accounting Exhibit 1. 2 Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we use accounting. Access the text alternative for slide images. Learning Objective C 2: Identify users and uses of, and opportunities in, accounting. © Mc. Graw-Hill Education. 7

Learning Objective C 3 Explain why ethics are crucial to accounting. © Mc. Graw-Hill Education. 8

Ethics – A Key Concept Exhibit 1. 5 The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. Access the text alternative for slide images. Learning Objective C 3: Explain why ethics are crucial to accounting. © Mc. Graw-Hill Education. 9

Fraud Triangle Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization. Access the text alternative for slide images. Learning Objective C 3: Explain why ethics are crucial to accounting. © Mc. Graw-Hill Education. 10

Sarbanes-Oxley (SOX) • Congress passed the Sarbanes-Oxley Act to help stop financial abuses at companies that issue public stock. • SOX requires documentation and verification of internal controls and emphasizes effective internal controls. • Failure to comply can lead to penalties and criminal prosecution of executives. Learning Objective C 3: Explain why ethics are crucial to accounting. © Mc. Graw-Hill Education. 11

Dodd-Frank Wall Street Reform and Consumer Protection Act This act has two important provisions: 1. Clawback provision which mandates recovery of excessive pay and. 2. Whistleblower provision whereby the SEC will pay whistleblowers 10% to 30% of sanctions exceeding $1, 000. Learning Objective C 3: Explain why ethics are crucial to accounting. © Mc. Graw-Hill Education. 12

Learning Objective C 4 Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 13

Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (G AAP). GAAP aims to make information relevant, reliable, and comparable. Access the text alternative for slide images. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 14

International Standards In today’s global economy, there is increased demand by external users for comparability in accounting reports. International Accounting Standards Board (IASB) Issues International Financial Reporting Standards (IFRS) Identify preferred accounting practices Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 15

Conceptual Framework The FASB and IASB are attempting to converge and enhance the conceptual framework that guides standard setting. The framework consists broadly of the following: Exhibit 1. 6 • Objectives—to provide information useful to investors, creditors, and others. • Qualitative Characteristics—to require information that is revelant, reliable, and comparable. • Elements—to define items that financial statements can contain. • Recognition and Measurement—to set criteria that an item must meet for it to be recognized as an element; and how to measure that element. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 16

Principles, Assumptions, and Constraint Exhibit 1. 7 General principles are the assumptions, concepts, and guidelines for preparing financial statements. Specific principles are detailed rules used in reporting business transactions and events. Access the text alternative for slide images. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles © Mc. Graw-Hill Education. 17

Accounting Principles Measurement Principle (Cost Principle). Revenue Recognition Principle. Expense Recognition Principle (Matching Principle). Full Disclosure Principle. Accounting information is based on actual cost. Actual cost is considered objective. A company records its expenses incurred to generate the revenue reported. 1. Recognize revenue when goods or services are provided to customers and. 2. At an amount expected to be received from the customer. A company reports the details behind financial statements that would impact users’ decisions in the notes to the financial statements. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 18

Accounting Assumptions Going-Concern Assumption. The business is presumed to continue operating instead of being closed or sold. Monetary Unit Assumption. Business Entity Assumption. A business is accounted for separately from other business entities, including its owner. Time Period Assumption. Transactions and events are expressed in monetary, or money, units. The life of a company can be divided into time periods, such as months and years. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 19

Proprietorship, Partnership, Corporation, and Limited Liability Company Here are some of the major attributes of sole proprietorships, partnerships, corporations, and limited liability companies (L LC): Exhibit 1. 8 Access the text alternative for slide images. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 20

Accounting Constraint Cost-benefit Only information with benefits of disclosure greater than the cost need be disclosed. Materiality Only information that would influence the decisions of a reasonable person need be disclosed. Learning Objective C 4: Explain generally accepted accounting principles and define and apply several accounting principles. © Mc. Graw-Hill Education. 21

Learning Objective A 1 Define and interpret the accounting equation and each of its components. © Mc. Graw-Hill Education. 22

Business Transaction and Accounting The Accounting Equation: Assets = Liabilities + Equity Expanded Accounting Equation: Access the text alternative for slide images. Learning Objective A 1: Define and interpret the accounting equation and each of its components. © Mc. Graw-Hill Education. 23

Learning Objective P 1 Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 24

Transaction 1: Investment by Owner Chas Taylor invests $30, 000 cash to start a corporation named Fast. Foward. The accounts involved are: (1) Cash (asset) ↑ (2) Common Stock (equity) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 25

Accounting Equation 1 Chas Taylor invests $30, 000 cash to start the business, Fast. Foward. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 26

Transaction 2: Purchase Supplies for Cash Company purchased supplies paying $2, 500 cash. The accounts involved are: (1) Cash (asset) ↓ (2) Supplies (asset) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 27

Accounting Equation 2 Company purchased supplies paying $2, 500 cash. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 28

Transaction 3: Purchase Equipment for Cash Purchased equipment for $26, 000 cash. The accounts involved are: (1) Cash (asset) ↓ (2) Equipment (asset) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 29

Accounting Equation 3 Purchased equipment for $26, 000 cash. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 30

Transaction 4: Purchase Supplies on Credit Purchased supplies of $7, 100 on credit. The accounts involved are: (1) Supplies (asset) ↑ (2) Accounts Payable (liability) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 31

Accounting Equation 4 Purchased supplies of $7, 100 on credit. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 32

Transaction Analysis: Revenues, Expenses, and Dividends Now, let’s look at transactions involving revenues, expenses, and dividends. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 33

Transaction 5: Provide Services for Cash Provided consulting services to a customer and received $4, 200 cash right away. begin underline end under line The accounts involved are: (1) Cash (asset) ↑ (2) Revenues (equity) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 34

Accounting Equation 5 Provided consulting services to a customer and received $4, 200 cash right away. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 35

Transaction 6 and 7: Payment of Expenses in Cash Paid rent of $1, 000 and salaries of $700 to employees. The accounts involved are: (1) Cash (asset) ↓ (2) Rent expense ↑ (equity) ↓ (3) Salaries expense ↑ (equity) ↓ Remember that the balance in the Expense accounts actually increase. But, total Equity decreases, because expenses reduce equity. begin underline end underline Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 36

Accounting Equation 6 and 7 Paid rent of $1, 000 and salaries of $700 to employees. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 37

Transaction 8: Provide Services and Facilities for Credit Provided consulting services of $1, 600 and rents facilities for $300 to a customer for credit. The accounts involved are: (1) Accounts Receivable (asset) ↑ (2) Consulting Revenues (equity) ↑ (3) Rental Revenue (equity) ↑ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 38

Accounting Equation 8 Provided consulting services of $1, 600 and rents facilities for $300 to a customer for credit. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 39

Transaction 9: Receipt of Cash from Accounts Receivable Client in transaction 8 pays $1, 900 for consulting services. The accounts involved are: (1) Cash (asset) ↑ (2) Accounts receivable (asset) ↓ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 40

Accounting Equation 9 Client in transaction 8 pays $1, 900 for consulting services. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 41

Transaction 10: Payment of Accounts Payable Fast. Forward pays $900 as partial payment for supplies purchased in transaction 4. The accounts involved are: (1) Cash (asset) ↓ (2) Accounts payable (liability) ↓ Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 42

Accounting Equation 10 Fast. Forward pays $900 as partial payment for supplies purchased in transaction 4. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 43

Transaction 11: Payment of Cash Dividend to Owner withdraws $200 cash for personal use. The accounts involved are: (1) Cash (asset) ↓ (2) Dividends ↑ (equity) ↓ Remember that the Dividends account actually increases (just like our Expense accounts). But, total Equity decreases because Dividends cause equity to go down!! begin underline end underline Learning Objective P 1: Analyze business transactions using the accounting equation. begin underline end underline © Mc. Graw-Hill Education. 44

Accounting Equation 11 Owner withdraws $200 cash for personal use. Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 45

Summary of Transactions Exhibit 1. 9 Access the text alternative for slide images. Learning Objective P 1: Analyze business transactions using the accounting equation. © Mc. Graw-Hill Education. 46

Learning Objective P 2 Identify and prepare basic financial statements and explain how they interrelate. © Mc. Graw-Hill Education. 47

Financial Statements The four financial statements and their purposes are: 1. Income statement — describes a company’s revenues and expenses and computes net income or loss over a period of time. 2. Statement of retained earnings— explains changes in retained earnings from net income (or loss) and from any dividends over a period of time. 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. Learning Objective P 2: Identify and prepare basic financial statements and explain how they interrelate. © Mc. Graw-Hill Education. 48

Exhibit 1. 10: Financial Statements and Their Links – Part 1 Access the text alternative for slide images Learning Objective P 2: Identify and prepare basic financial statements and explain how they interrelate. © Mc. Graw-Hill Education. 49

Exhibit 1. 10: Financial Statements and Their Links – Part 2 Access the text alternative for slide images Learning Objective P 2: Identify and prepare basic financial statements and explain how they interrelate. © Mc. Graw-Hill Education. 50

Learning Objective A 2 Compute and interpret return on assets. © Mc. Graw-Hill Education.

Return on Assets Return on assets (ROA) is stated in ratio form as net income divided by the average total assets invested. Return on Assets Nike Under Armour Current Year 1 Year Ago 2 Years Ago 19. 0% 17. 5% 16. 3% 7. 9 9. 4 11. 4 Learning Objective A 2: Compute and interpret return on assets. Exhibit 1. 12 © Mc. Graw-Hill Education. 52

Learning Objective A 3 Appendix 1 A Explain the relation between return and risk.

Appendix 1 A Return and Risk Analysis Risk is the uncertainty about the return we will earn. Exhibit 1 A. 1 The lower the risk, the lower our expected return. Access the text alternative for slide images Learning Objective A 3: Explain the relation between return and risk. © Mc. Graw-Hill Education. 54

Learning Objective C 5 Appendix 1 B Identify and describe three major activities of organizations. © Mc. Graw-Hill Education. 55

Financing Activities One of the three major types of business activities: Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. • Owner financing—resources contributed by the owner along with any income the owner leaves in the organization. • Nonowner financing—resources contributed by creditors (lenders). Learning Objective C 5: Identify and describe three major activities of organization. © Mc. Graw-Hill Education. 56

Investing Activities One of the three major types of business activities: Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. • Asset management—determining the amount and type of assets for operations. • Assets—invested amounts. • Liabilities—creditors’ claims. • Equity—owner’s claim. Learning Objective C 5: Identify and describe three major activities of organization. © Mc. Graw-Hill Education. 57

Operating Activities One of the three major types of business activities: Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. • Strategic management — the process of determining the right mix of operating activities for the type of organization, its plans, and its market. Learning Objective C 5: Identify and describe three major activities of organization. © Mc. Graw-Hill Education. 58

Activities of Organizations Exhibit 1 B. 1 Learning Objective C 5: Identify and describe three major activities of organizations. © Mc. Graw-Hill Education. 59