Introduction to Accounting and Business

1. 1 Introduction to Accounting and Business

2. After studying this chapter, you should be able to: • Describe the nature of a business and the role of ethics and accounting in business. • Summarize the development of accounting principles and relate them to practice. • State the accounting equation and define each element of the equation.

3. After studying this chapter, you should be able to: • Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation. • Describe the financial statements of a corporation and explain how they interrelate.

4. 1-1 Objective 1 Describe the nature of a business and the role of ethics and accounting in business.

5. ServiceBusinessService The Walt Disney Company Entertainment Delta Air Lines Transportation Marriott International Hotels Hospitality and lodging Bank of America Corporation Financial services XM Satellite Radio Satellite radio 1-1 Types of Businesses

6. Merchandising BusinessProduct Wal-Mart General merchandise GameStop Corporation Video games and accessories Best Buy Consumer electronics Gap Inc. Apparel Amazon.com Internet books, music, video 1-1 Types of Businesses

7. Manufacturing BusinessProduct General Motors Corp. Cars, trucks, vans Samsung Cell phones Dell Inc. Personal computers Nike Athletic shoes and apparel The Coca-Cola Company Beverages Sony Corporation Stereos and televisions 1-1 Types of Businesses

8. 1-1 Common Forms of Business Organizations • Proprietorship • Partnership • Corporation • Limited liability company

9. 1-1 A proprietorshipis owned by one individual and— • Comprises ___________ of business organizations in the United States. • Requires low cost of organizing. • Is limited to financial resources of the owner. • Is used by small businesses.

10. 1-1 A partnershipis similar to a proprietorship except that it is owned by two or more individuals and— • Comprises ___________ of business organizations in the United States. • Combines the skills and resources of more than one person.

11. 1-1 A corporationis organized under state or federal statues as a _________________ ___________ _____________ entity and— • Generates ______________ of the total dollars of business receipts received. • Comprises ______________ of the businesses in the United States. (Continued)

12. 1-1 A limited liability company(LLC)combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and— • Is a popular alternative to a partnership. • Has tax and liability advantages to the owners.

13. 1-1 A business stakeholderis a person orentity having an interest in the economic performance and well-being of a business.

14. 1-1 The moral principles that guide the conduct of individuals are called ethics.

15. 1-1 Accountingcan be defined as aninformation system that provides reports to stakeholders about the economic activities and condition of a business.

16. 1-1 23

17. 1-1 Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

18. 1-2 Objective 2 Summarize the development of accounting principles and relate them to practice.

19. 1-2 The ______________ ____________ ________________limits the economic data in the accounting system to data related directly to the activities of the business. The ___________ ________________ is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

20. 1-2 The _________________ __________________ requires that the accounting records and reports be based upon objective evidence. The ____________ ____ _________________requires that economic data be recorded in dollars.

21. 1-3 Objective 3 State the accounting equation and define each element of the equation.

22. 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity

23. 1-4 Objective 4 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.

24. 1-4 A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

25. 0 1-4 On November 1, 2007, Chris Clark organizes a corporation that will be known as NetSolutions. * See NetSolution notes from WEBCT for NetSolutions transactions and illustration of the basic accounting equation.

26. 1-4 Expenses The amounts used in earning revenue are called expenses. Expenses are assets that have been used up, consumed, or expired. Adding expenses to the stockholders’ equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 50, 52, 54, and 56. The bottom row in these four slides provides the balances after each transaction.

27. 1-4 Dividends are distributions of earnings to stockholders. You should be careful not to confuse dividends with expenses. Dividends do not represent assets or services used in the process of earning revenues.

28. Decreased by Increased by Dividends paid to stockholders Expenses Investments by stockholders Revenues 1-4 Stockholders’ Equity 58

29. 1-4 Retained Earnings Retained earnings represent stockholders’ equity created from business operations through revenue, expense, and dividend transactions.

30. 1-5 Objective 5 Describe the financial statements of a corporation and explain how they interrelate.

31. 1-5 Accounting reports, called financial statements, provide summarized information to the owner.

32. 1-5 The incomestatement is a summary of the revenue and expenses for a specific period of time, such as a month or a year.

33. 1-5 Income Statement The income statement reports the revenues and expenses for a period of time based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses.

34. 1-5 The excess of revenue over the expenses is called netincomeor net profit. If the expenses exceed the revenue, the excess is anet loss.

35. 1-5 A retained earnings statementis a summary of the changes in the earnings retained in the corporation for a specific period of time.

36. 1-5 Retained Earnings Statement The retained earningsstatement analyzes the changes in the stockholders’ equity of corporation for a period of time. The retained earnings statement is the second statement prepared because it needs the net income or net loss determined on the income statement.

37. 1-5 A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

38. 1-5 Balance Sheet Thebalance sheetreports the amounts of a firm’s assets, liabilities, and stockholders’ equity at the end of a specific period.

39. 1-5 A statement of cash flows is a summary of the cash receipts and payments for a specific period of time.