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Introduction to Accounting and Business

1. Introduction to Accounting and Business. Service Business Service. 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. 0. 1-1.

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Introduction to Accounting and Business

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  1. 1 Introduction to Accounting and Business

  2. 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 0 1-1 Types of Businesses

  3. 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 0 1-1 Types of Businesses

  4. 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 0 1-1 Types of Businesses

  5. 0 1-1 Common Forms of Business Organizations • Proprietorship • Partnership • Corporation • Limited liability company

  6. 0 1-1 A proprietorshipis owned by one individual and— • Comprises 70% 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.

  7. 0 1-1 A partnershipis similar to a proprietorship except that it is owned by two or more individuals and— • Comprises 10% of business organizations in the United States. • Combines the skills and resources of more than one person.

  8. 0 1-1 A corporationis organized under state or federal statues as a separate legal taxable entity and— • Generates 90% of the total dollars of business receipts received. • Comprises 20% of the businesses. Continued

  9. 0 1-1 • Includes ownership divided into shares of stock, sold to shareholders (stockholders). • Is able to obtain large amounts of resources by issuing stock. • Is used by large businesses.

  10. 0 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.

  11. 0 1-1 A business stakeholderis a person orentity having an interest in the economic performance and well-being of a business.

  12. 0 1-1 Capital market stakeholdersprovide the major financing for the business in order for the business to begin and continue its operations.

  13. 0 1-1 Product or service marketstakeholdersinclude customers who purchase the business’s products or services as well as the vendors who supply inputs to the business.

  14. 0 1-1 Government stakeholdershave an interest in the economic performance of a business. City, county, state, and federal governments collect taxes from businesses within their jurisdiction.

  15. 0 1-1 Internal stakeholdersinclude individuals employed by the business. Managers have an incentive to maximize the economic value of the business. Employees have an interest because their jobs depend on it.

  16. 0 1-1 Accountingcan be defined as aninformation system that provides reports to stakeholders about the economic activities and condition of a business.

  17. 0 1-1 The moral principles that guide the conduct of individuals are called ethics.

  18. 0 1-1 Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business. Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

  19. 0 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.

  20. 0 1-2 The business entity conceptlimits the economic data in the accounting system to data related directly to the activities of the business.

  21. 0 1-2 The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

  22. 0 1-2 The objectivity concept requires that the accounting records and reports be based upon objective evidence.

  23. 0 1-2 The unit of measureconceptrequires that economic data be recorded in dollars.

  24. Example Exercise 1-1 Follow My Example 1-1 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 31 0 1-2 On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

  25. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

  26. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

  27. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

  28. Example Exercise 1-3 0 1-4 Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February: Received cash from owner as additional investment, $35,000. Paid creditors on account, $1,800. Billed customers for delivery services on account, $11,250. Received cash from customers on account, $6,740. Paid cash to owners for personal use, $1,000. 56 Continued

  29. Example Exercise 1-3 0 1-4 Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below. (1) Asset (Cash) increases by $35,000; Owner’s Equity (Joel Salvo, Capital) increases by $35,000. 57

  30. Follow My Example 1-3 0 1-4 • Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800. • Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250. • Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740. • Asset (Cash) decreases by $1,000; Owner’s Equity (Joel Salvo, Drawing) increases by $1,000. 58 For Practice: PE 1-3A, PE 1-3B

  31. 0 1-5 Accounting reports, called financial statements, provide summarized information to the owner.

  32. 0 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. 0 1-5 Income Statement Net income is carried to the statement of owner’s equity 62

  34. 0 1-5 A statement of owner’s equityis a summary of the changes in the owner’s equity that have occurred during a specific period of time.

  35. 0 1-5 Statement of Owner’s Equity From the income statement To the balance sheet 64

  36. 0 1-5 A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

  37. 0 1-5 Balance Sheet This amount is compared to the net cash flow on the statement of cash flows From the statement of owner’s equity 66

  38. 0 1-5 A statement of cash flows is a summary of the cash receipts and payments for a specific period of time.

  39. 0 1-5 Statement of Cash Flows This amount should match Cash on the balance sheet. 68

  40. 0 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.

  41. 0 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.

  42. Example Exercise 1-4 0 1-5 The assets and liabilities of Chickadee Travel Service at April 30, 2008, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2007, the beginning of the current year. Accounts payable $ 12,200 Miscellaneous expense $ 12,950 Accounts receivable 31,350 Office expense 63,000 Cash 53,050 Supplies 3,350 Fees earned 263,200 Wages expense 131,700 Land 80,000 Prepare an income statement for the current year ended April 30, 2008. 71

  43. Follow My Example 1-4 0 1-5 CHICKADEE TRAVEL SERVICE INCOME STATEMENT For the Year Ended April 30, 2008 Fees earned $263,200 Expenses: Wages expense $131,700 Office expense 63,000 Miscellaneous expense 12,950 Total expenses 207,650 Net income $ 55,550 72 For practice: PE 1-4A, PE 1-4B

  44. 0 1-5 Statement of Owner’s Equity The statement of owner’sequity reports the changes in the owner’s equity for a period of time. It is prepared after the income statement.

  45. Example Exercise 1-5 0 1-5 Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, 2008. Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use. 74

  46. Follow My Example 1-5 0 1-5 CHICKADEE TRAVEL SERVICE STATEMENT OF OWNER’S EQUITY For the Year Ended April 30, 2008 Adam Cellini, capital, May 1, 2007 $ 80,000 Additional investment by owner during year $ 50,000 Net income for the year 55,550 $105,550 Less withdrawals 30,000 Increase in owner’s equity 75,550 Adam Cellini, capital, April 30, 2008 $155,550 75 For Practice: PE 1-5A, PE 1-5B

  47. 0 1-5 Balance Sheet Thebalance sheetreports the amounts of a firm’s assets, liabilities, and owner’s equity at the end of a specific period.

  48. 0 1-5 The account form of balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to design of an account.

  49. 0 1-5 The report form of balance sheet presents the liabilities and owner’s equity sections below the assets section.

  50. Example Exercise 1-6 Follow My Example 1-6 CHICKADEE TRAVEL SERVICE BALANCE SHEET April 30, 2008 Assets Liabilities Cash $ 53,050 Accounts payable $12,200 Accounts receivable 31,350 Supplies 3,350 Owner’s Equity Land 80,000 Adam Cellini, capital 155,550 Total assets $167,750 Total liab. & owner’s eq. $167,750 0 1-5 Using the data for Chickadee Travel Service shown in Example Exercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008. 79 For Practice: PE 1-6A, PE 1-6B

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