Financial Accounting John J. Wild 4th Edition Information for Decisions
Chapter 1 Introducing Accounting in Business
Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting C3: Identify opportunities in accounting and related fields C4: Explain why ethics are crucial in accounting C5: Explain the meaning of GAAP, and define and apply several key accounting principles C6: Appendix 1B: Identify and describe the three major activities in organizations
Analytical Chapter Objectives A1: Define and interpret the accounting equation and each of its components A2: Analyze business transactions using the accounting equation A3: Compute and interpret return on assets A4: Appendix 1A: Explain the relationship between return and risk
Procedural Chapter Objectives P1: Identify and prepare basic financial statements and explain how they interrelate
is a system that information that is Importance of Accounting C1 Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable
Accounting Activities C 1 • Identifying Business Activities • Recording Business Activities • Communicating Business Activities
Internal Users External Users • Lenders • Shareholders • Governments • Consumer Groups • External Auditors • Customers • Managers • Officers/Directors • Internal Auditors • Sales Staff • Budget Officers • Controllers Users of Accounting Information C 2
ExternalUsers Financial accountingprovides external users with financial statements. Users of Accounting Information C 2 Internal Users Managerial accounting provides information needs for internal decision makers.
Financial Managerial Taxation • Preparation • Analysis • Auditing • Regulatory • Consulting • Planning • Criminal investigation • General accounting • Cost accounting • Budgeting • Internal auditing • Consulting • Controller • Treasurer • Strategy • Preparation • Planning • Regulatory • Investigations • Consulting • Enforcement • Legal services • Estate plans • Lenders • Consultants • Analysts • Traders • Directors • Underwriters • Planners • Appraisers • FBI investigators • Market researchers • Systems designers • Merger services • Business valuation • Human services • Litigation support • Entrepreneurs Accounting-related Opportunities in Accounting C 3
Ethics Ethics—A Key Concept C 4 Beliefs that distinguish right from wrong Accepted standards of good and bad behavior
Guidelines for Ethical Decisions C 4 • Make ethical decision • Identify ethical concerns • Analyze options Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.
Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Used in comparisons across years & companies. Generally Accepted Accounting Principles C 5 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Setting Accounting Principles C 5 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. The International Accounting Standards Board (IASB) issues inter- national standards that identify preferred accounting practices in other countries. The IASB does not have authority to impose its standards on companies.
Now Future Objectivity Principle Accounting information is supported by independent, unbiased evidence. Cost Principle Accounting information is based on actual cost. Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Principles of Accounting C 5
Revenue Recognition Principle • Recognize revenue when it is earned. • Proceeds need not be in cash. • Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. Principles of Accounting C 5
Sole Proprietorship Partnership Corporation Business Entity Forms C 5
* * Characteristics of Businesses C 5 *Proprietorships and partnerships that are set up as LLC’s provide limited liability.
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). Corporation C 5
= + Assets Liabilities Equity Accounting Equation A1 Liabilities & Equity Assets
Assets A1 Cash Accounts Receivable Notes Receivable Resources owned or controlled by a company Vehicles Land Buildings Store Supplies Equipment
Liabilities A1 Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Taxes Payable
Equity A1 Retained Earnings Contributed Capital Owner’s claim on assets Dividends
Assets Liabilities Equity _ _ = + Common Stock Dividends + Revenues Expenses = + Assets Liabilities Equity Retained Earnings Expanded Accounting Equation A1
The accounting equation MUST remain in balance after each transaction. = + Assets Liabilities Equity Transaction Analysis Equation A2
The accounts involved are: (1) Cash(asset) (2) Common Stock(equity) Transaction Analysis A2 J. Scott invests $20,000 cash to start the business in exchange for stock.
Transaction Analysis A2 J. Scott invests $20,000 cash to start the business in return for stock.
The accounts involved are: (1) Cash(asset) (2) Supplies(asset) Transaction Analysis A2 Purchased supplies paying $1,000 cash.
Transaction Analysis A2 Purchased supplies paying $1,000 cash.
The accounts involved are: (1) Cash(asset) (2) Equipment(asset) Transaction Analysis A2 Purchased equipment for $15,000 cash.
Transaction Analysis A2 Purchased equipment for $15,000 cash.
Transaction Analysis A2 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)
Transaction Analysis A2 Purchased Supplies of $200 and Equipment of $1,000 on account.
Transaction Analysis A2 Borrowed $4,000 from 1st American Bank.
Transaction Analysis A2 The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Transaction Analysis A2 Now, let’s look at transactions involving revenue, expenses and dividends.
Transaction Analysis A2 Provided consulting services receiving $3,000 cash. The accounts involved are: (1) Cash(asset) (2) Revenues(equity)
Transaction Analysis A2 Provided consulting services receiving $3,000 cash.
Transaction Analysis A2 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 decreases because expenses reduce equity.
Transaction Analysis A2 Paid salaries of $800 to employees. Remember that expensesdecreaseequity.
Transaction Analysis A2 Dividends of $500 are paid to shareholders. The accounts involved are: (1) Cash(asset) (2) Dividends(equity) Remember that the Dividend account actually increases. But,equitydecreases because dividends reduce equity.
Transaction Analysis A2 Dividends of $500 are paid to shareholders. Remember that dividendsdecreaseequity.
Financial Statements P1 Let’s prepare the Financial Statements reflecting the transactions we have recorded. • Income Statement • Statement of Retained Earnings • Balance Sheet • Statement of Cash Flows
Income Statement P1 Net income is the difference between Revenues and Expenses. The income statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
Statement of Retained Earnings P1 The net income of $2,200 increases Retained Earnings by $2,200.
Balance Sheet P1 TheBalance Sheetdescribes a company’s financial position at a point in time.
Return onassets Net incomeAverage total assets = Return on Assets (ROA) P1 ROA is viewed as an indicator of operating efficiency.