Fundamental Accounting Principles 17 th Edition Larson Wild

Fundamental Accounting Principles 17 th Edition Larson Wild Chiappetta Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Chapter 1 Mc. Graw-Hill/Irwin Accounting in Business © The Mc. Graw-Hill Companies, Inc. , 2005

Importance of Accounting is a system that Identifies Records Relevant information that is Communicates Reliable Comparable Mc. Graw-Hill/Irwin to help users make better decisions. © The Mc. Graw-Hill Companies, Inc. , 2005

Accounting Activities ŒIdentifying Business Activities Mc. Graw-Hill/Irwin Recording Business Activities Communicati ng Business Activities © The Mc. Graw-Hill Companies, Inc. , 2005

Users of Accounting Information Internal Users External Users • Lenders • Managers • Sales Staff • Shareholders • External Auditors • Officers • Budget Officers • Governments • Customers • Internal Auditors • Controllers Mc. Graw-Hill/Irwin • Consumer Groups © The Mc. Graw-Hill Companies, Inc. , 2005

Users of Accounting Information External Users Internal Users Financial accounting provides external users with financial statements. Managerial accounting provides information needs for internal decision makers. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Opportunities in Accounting Financial • Preparation • Analysis • Auditing • Regulatory • Consulting • Planning • Criminal investigation Accountingrelated Mc. Graw-Hill/Irwin Managerial Taxation • 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 © The Mc. Graw-Hill Companies, Inc. , 2005

Accounting Jobs by Area Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Ethics—A Key Concept Ethics Beliefs that distinguish right from wrong Mc. Graw-Hill/Irwin Accepted standards of good and bad behavior © The Mc. Graw-Hill Companies, Inc. , 2005

Guidelines for Ethical Decision Making ŒIdentify ethical concerns Analyze options Use personal Consider all good ethics to and bad recognize ethical consequences. concern. Mc. Graw-Hill/Irwin Make ethical decision Choose best option after weighing all consequences. © The Mc. Graw-Hill Companies, Inc. , 2005

Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information Reliable Information Comparable Information Mc. Graw-Hill/Irwin Affects the decision of its users. Is trusted by users. Is helpful in contrasting organizations. © The Mc. Graw-Hill Companies, Inc. , 2005

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. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Principles of Accounting Objectivity Principle Accounting information is supported by independent, unbiased evidence. Now Mc. Graw-Hill/Irwin Cost Principle Accounting information is based on actual cost. Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. © The Mc. Graw-Hill Companies, Inc. , 2005

Principles of Accounting Monetary Unit Principle Express transactions and events in monetary, or money, units. Revenue Recognition Principle 1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received. Business Entity Principle A business is accounted for separately from other business entities, including its owner. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Business Entity Forms Proprietorship Mc. Graw-Hill/Irwin Partnership Corporation © The Mc. Graw-Hill Companies, Inc. , 2005

Exh. 1. 8 Characteristics of Businesses * * * Proprietorships and partnerships that are set up as LLC’s provide limited liability. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

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). Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Accounting Equation Assets = Liabilities Assets Mc. Graw-Hill/Irwin + Equity Liabilities & Equity © The Mc. Graw-Hill Companies, Inc. , 2005

Assets Cash Accounts Receivable Vehicles Store Supplies Mc. Graw-Hill/Irwin Resources owned or controlled by a company Notes Receivable Land Buildings Equipment © The Mc. Graw-Hill Companies, Inc. , 2005

Liabilities Accounts Payable Notes Payable Creditors’ claims on assets Taxes Payable Mc. Graw-Hill/Irwin Wages Payable © The Mc. Graw-Hill Companies, Inc. , 2005

Equity Owner Withdrawals Owner Investments Owner’s claims on assets Revenues Mc. Graw-Hill/Irwin Expenses © The Mc. Graw-Hill Companies, Inc. , 2005

Expanded Accounting Equation = Assets Owner Capital Mc. Graw-Hill/Irwin _ Liabilities Owner Withdrawals + + Revenues Equity _ Expenses © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Equation The accounting equation must remain in balance after each transaction. Assets Mc. Graw-Hill/Irwin = Liabilities + Equity © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis J. Scott, the owner, contributed $20, 000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis J. Scott, the owner, contributed $20, 000 cash to start the business. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased supplies paying $1, 000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased supplies paying $1, 000 cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased equipment for $15, 000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased equipment for $15, 000 cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased Supplies of $200 and Equipment of $1, 000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Purchased Supplies of $200 and Equipment of $1, 000 on account. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Borrowed $4, 000 from 1 st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Borrowed $4, 000 from 1 st American Bank. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

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 withdrawals. © The Mc. Graw-Hill Companies, Inc. , 2005 Mc. Graw-Hill/Irwin

Transaction Analysis Rendered consulting services receiving $3, 000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Rendered consulting services receiving $3, 000 cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis Paid salaries of $800 to employees. Remember that expenses decrease equity. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis J. Scott withdrew $500 from the business for personal use. The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Transaction Analysis J. Scott withdrew $500 from the business for personal use. Remember that withdrawals decrease equity. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1. Income Statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Statement of Cash Flows Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

The net income of $2, 200 increases Scott’s capital by $2, 200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

The Balance Sheet describes a company’s financial position at a point in time. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time. © The Mc. Graw-Hill Companies, Inc. , 2005 Mc. Graw-Hill/Irwin

Return on Assets (ROA) Net income ÷ Average total assets ROA is viewed as an indicator of operating efficiency. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005

End of Chapter 1 Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2005