Financial Accounting

1. Financial Accounting John Wild3rd Edition Information for Decisions

2. Chapter 1 Accounting in Business

3. is a system that information that is Importance of Accounting Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable

4. Accounting Activities • Identifying Business Activities • Recording Business Activities • Communicating Business Activities

5. Internal Users External Users • Lenders • Shareholders • Governments • Consumer Groups • External Auditors • Customers • Managers • Officers • Internal Auditors • Sales Staff • Budget Officers • Controllers Users of Accounting Information

6. External Users Financial accountingprovides external users with financial statements. Users of Accounting Information Internal Users Managerial accounting provides information needs for internal decision makers.

7. 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 planning • 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

8. Accounting Jobs by Area

9. Ethics Ethics—A Key Concept Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

10. Guidelines for Ethical Decisions • 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.

11. Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).

12. Setting Accounting Principles 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.

13. Now Future Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence. Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Principles of Accounting

14. 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

15. Sole Proprietorship Partnership Corporation Business Entity Forms

16. * * Characteristics of Businesses *Proprietorships and partnerships that are set up as LLC’s provide limited liability.

17. 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

18. = + Assets Liabilities Equity Accounting Equation Liabilities & Equity Assets

19. Assets Cash Accounts Receivable Notes Receivable Resources owned or controlled by a company Vehicles Land Buildings Store Supplies Equipment

20. Liabilities Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Taxes Payable

21. Equity Retained Earnings Contributed Capital Owner’s claim on assets Dividends

22. Assets Liabilities Equity _ _ = + Common Stock Dividends + Revenues Expenses Retained Earnings Expanded Accounting Equation

23. The accounting equation must remain in balance after each transaction. = + Assets Liabilities Equity Transaction Analysis Equation

24. The accounts involved are: (1) Cash (asset) (2) Common Stock (equity) Transaction Analysis J. Scott invests $20,000 cash to start the business.

25. Transaction Analysis J. Scott invests $20,000 cash to start the business.

26. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.

27. Transaction Analysis Purchased supplies paying $1,000 cash.

28. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.

29. Transaction Analysis Purchased equipment for $15,000 cash.

30. Transaction Analysis The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Purchased Supplies of $200 and Equipment of $1,000 on account.

31. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.

32. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Borrowed $4,000 from 1st American Bank.

33. Transaction Analysis Borrowed $4,000 from 1st American Bank.

34. Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and dividends.

35. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Provided consulting services receiving $3,000 cash.

36. Transaction Analysis Provided consulting services receiving $3,000 cash.

37. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity.

38. Transaction Analysis Paid salaries of $800 to employees. Remember that expensesdecreaseequity.

39. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Dividends (equity) Dividends of $500 are paid to shareholders. Remember that the Dividend account actually increases. But, equity decreases because dividends reduce equity.

40. Transaction Analysis Dividends of $500 are paid to shareholders. Remember that withdrawalsdecreaseequity.

41. Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. • Income Statement • Statement of Retained Earnings • Balance Sheet • Statement of Cash Flows

42. Income Statement Net income is the difference between Revenues and Expenses. Theincome statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

43. Statement of Retained Earnings The net income of $2,200 increases Retained Earnings by $2,200.

44. Balance Sheet TheBalance Sheetdescribes a company’s financial position at a point in time.

45. Statement of Cash Flows

46. Return onassets Net incomeAverage total assets = Return on Assets (ROA) ROA is viewed as an indicator of operating efficiency.

47. End of Chapter 1