Chapter 1 Accounting and The Business Environment
Two Fields of Accounting Financial Accounting Managerial Accounting Focuses on information for internal decision makers Managers Business Owners Employees Provides information for external decision makers • Investors • Creditors • Taxing Authorities
S1-2: USERS OF FINANCIAL INFORMATION Suppose you are the manager of Greg’s Tunes, Inc. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s stockholders’ equity. Requirements: • Is the banker considered an internal or external user of financial information? • Which financial statement would provide the best information to answer the banker’s questions?
The Accounting Profession • Lucrative career with many opportunities • Certified Public Accountants (CPAs)
Ethics in Accounting and Business Conflict of Interest
Audit • SEC requires companies to have financial statements examined by independent accountants • Auditors will provide an opinion on financial statements, if possible • Recent accounting scandals hurt investor confidence • SOX • PCAOB
Organization of a Corporation • Incorporators obtain charter from the state • Charter authorizes corporation to: • Issue stock • Conduct business in accordance with state law • Incorporators agreed to a set of bylaws • Corporations begins to exist when stock is issued
S1-4: TYPES OF BUSINESS ORGANIZATION Chloe Michaels plans on opening Chloe Michaels’ Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Chloe wants the option to raise additional equity easily in the future. Which type of business organization will meet Chloe’s needs best?
GAAP • Generally Accepted Accounting Principles • Guidelines that govern accounting • Based on a conceptual framework
The Accounting Equation ASSETS LIABILITIES EQUITY Economic Resources Claims to Economic Resources
Assets • Economic resources • Benefit the business in the future
Claims to Assets Liabilities Equity Owners’ claims to the assets of the business • Debts payable to outsiders
The Accounting Equation Assets Liabilities Equity Assets Liabilities Equity
Equity of a Corporation Liabilities Assets Stockholders’equity Paid-in capital Retained earnings
Net Income + Net income(loss) + Revenues - Expenses Retained earnings - Dividends
Revenues • Amounts earned by delivering goods or services to customers • Sales revenue • Service revenue • Interest revenue • Dividend revenue
Expenses • Outflows of assets or increasing liabilities in the course of delivering goods or services to customers • Store or rent expense • Salary expense • Advertising expense • Utilities expense • Interest expense • Property tax expense
E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE ACCOUNTING EQUATION Select financial information for three corporations follows: Requirements: 1. Compute the missing amount in the accounting equation for each entity. $74,000 $ ? $43,000 $ ? $47,000 $ ?
E1-16: CONTINUED 2. List the seven main characteristics of a corporation. 3. Which accounting concept tells us that the previous three corporations will continue to exist in the future? Continuous Life and transferability Corporate taxation Government regulation Limited Liability of Stockholders No Mutual Agency Separate Legal Entity Separation of ownership and managers Going Concern Concept
Transaction • An event that affects the financial position of the business • Can be measured reliably • Every transaction impacts at least two items • The accounting equation balances before and after each transaction
Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events: • Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C. E1-21: USING THE ACCOUNTING EQUATION TO ANALYZE TRANSACTIONS
Balance Sheet Statement of Retained Earnings Income Statement Preparing the Financial Statements Statement of Cash Flows
P1-36A: PREPARING FINANCIAL STATEMENTS Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, 2011. At December 31, 2012, the business’s accounting records show these balances: Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012: a. Income statement b. Statement of retained earnings c. Balance sheet
P1-36A: CONTINUED 47,000 76,000