chapter 1 accounting and the business environment
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Accounting and the
Business Environment
Chapter 1
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Objective 1
Use accounting vocabulary
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is an information system that...
measures business activities,
processes information, and...
communicates financial information.
Accounting...
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is called the language of business.
Accounting...
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External users
make decisions
about the entity.
Internal users
make decisions
for the entity.
Users of Accounting Information
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Management Accounting
Financial Accounting
Fields of Accounting
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Public Sector
(SEC)
Private Sector
(FASB)
Private Sector
(AICPA) (IMA)
GAAP
The Authority Underlying
Accounting
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AICPA’s Code of
Professional
Conduct
Standards of
Ethical
Conduct of the
Institute of
Management
Accountants
Standards of Professional
Conduct
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Proprietorships
Partnerships
Corporations
Types of Business Organizations
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Proprietorships
What are some advantages?
– total undivided authority
– no restrictions on type of business – must
be legal
What are some disadvantages?
– unlimited liability
– limitation on size – fund raising power
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Partnerships
What are some advantages?
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better credit standing – possibly
– more brain power, but consultation with
partners required
What are some disadvantages?
– unlimited personal liability for general
partners
– need for written partnership agreement
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Corporations
What are some advantages?
– separate legal existence
– limited liability of stockholders
– transferability of ownership relatively easy
What are some disadvantages?
– taxes – possible double taxation
– extensive governmental regulation
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Objective 2
Apply Accounting
Concepts and Principles
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To provide information useful
for making investment and
lending decisions
Generally Accepted
Accounting Principles
What is the primary objective of financial
reporting?
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The Entity Concept Example
Assume that John decides to open up a gas
station and coffee shop.
The gas station made $250,000 in profits,
while the coffee shop lost $50,000.
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The Entity Concept Example
How much money did John make?
At a first glance, we would assume that
John made $200,000.
However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.
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Information must be reasonably
accurate.
Information must be free from bias.
Information must report what
actually happened.
Individuals would arrive at similar
conclusions using same data.
The Reliability (Objectivity)
Principle
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Assets and services
acquired
should be recorded
at their actual cost.
The Cost Principle
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The entity will continue
to operate in the future.
The Going Concern Concept
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The dollar’s purchasing
power is relatively
stable.
The Stable-Monetary-Unit Concept
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Objective 3
Use the Accounting Equation
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Economic
Resources
Claims to
Economic
Resources
The Accounting Equation
Assets = Liabilities + Owner’s Equity
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Assets
What is an asset?
It is something a company owns which has
future economic value.
– land
– building
– equipment
– goodwill
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Liability
What is a liability?
It is something a company owes.
– money
– service – legal retainers
– product – magazines
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Owner’s Equity
What is owner’s equity?
It is what’s left of the assets after liabilities
have been deducted.
– the same as net assets
– the owner’s claim on the entity’s assets
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Transactions that Affect
Owner’s Equity OWNER’S EQUITY
INCREASES
OWNER’S EQUITY DECREASES
Owner Investments
in the Business
Revenues Expenses
Owner Withdrawals
from the Business
Owner’s Equity
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Revenues
What are revenues?
They are amounts received or to be
received from customers for sales of
products or services.
– sales
– performance of services
– rent
– interest
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Expenses
What are expenses?
They are amounts that have been paid or
will be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
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Objective 4
Analyze Business Transactions
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Accounting for Business
Transactions
What is a transaction?
It is any event that both affects the financial
position of the business and can be reliably
recorded.
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Accounting for Business
Transactions
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.
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Accounting for Business
Transactions
5 Gillen performs services, and the client
agrees to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which
she purchased $500 worth of supplies.
What is the effect of these transactions on
the accounting equation?
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Owner’s Assets = Liabilities + Equity
1) Cash + $30,000 + $30,000
2) Cash – 20,000
Land + 20,000
3) Supplies + 500 + 500
4) Cash + 5,500 + 5,500
5) Receivable + 3,000 + 3,000
6) Cash – 3,300 – 3,300
7) Cash – 300 – 300
Totals + $35,400 + 200 + $35,200
Accounting for Business
Transactions
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Accounting for Business
Transactions
Notice that the equation always stays in
balance.
Each transaction affects at least two
accounts, sometimes more.
Some transactions affect only one side of
the equation; some affect both sides.
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Accounting for Business
Transactions
Other transactions that took place were as
follows:
The business collected $1,000 from the
client.
She sold some land at cost for $9,000.
She withdrew $2,000 from the business.
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Objective 5
Prepare Financial Statements
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– are the final
product of the
accounting process.
– tell how the
business is performing
and where it stands.
Financial Statements...
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Financial Statements
– income statement
– statement of owner’s equity or retained
earnings
– balance sheet
– statement of cash flows
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Objective 6
Evaluate Business Performance
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Relationships Among the Statements:
Income Statement
Revenue:
Fees earned $8,500
Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200
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G. Gillen, capital, April 1, 20xx $ 0
Contribution of capital 30,000
Net income $ 5,200
Cash distributions – 2,000
G. Gillen, capital, April 30, 20xx $33,200
Relationships Among the Statements:
Statement of Owner’s Equity
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Relationships Among the Statements:
Balance Sheet
Assets
Cash $19,900
Accounts receivable 2,000
Supplies 500
Land 11,000
Total assets $ 33,400
Liabilities
Accounts payable $ 200
Owner’s equity,
G. Gillen, capital 33,200
Total liabilities and
owner’s equity $33,400
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Relationships Among the Statements:
Statement Of Cash Flows
Cash flows from operating activities:
Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses 3,300 3,600
Net cash flows from
Operating activities $2,900
Cash flows from investing activities
Purchase and sale of land ($11,000)
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Cash Flows from Financing Activities:
Investment by Owner $30,000
Withdrawals 2,000
Net Cash Flows from
Financing Activities $28,000
Cash at Beginning of Year 0
Cash at End of the Year $19,900
Relationships Among the Statements:
Statement Of Cash Flows
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End of Chapter
1