CHAPTER 1 INTRODUCTION TO BUSINESS AND ACCOUNTING

1. CHAPTER 1 INTRODUCTION TO BUSINESS AND ACCOUNTING

2. Chapter Overview • Why is it necessary to have an understanding of business before trying to learn about accounting? • What is the role of accounting information within the business environment? • What is private enterprise, and what forms does it take? • What types of regulations do companies face?

3. Chapter Overview • What activities contribute to the operations of a company? • Are there any guidelines for reporting to company managers? • Are there any guidelines in the United States for reporting to people outside of a company? • What role does ethics play in the business environment?

4. Will I be sufficiently informed to make good business decisions, both in my personal life and at work? What will I do when I graduate from college? Will I understand the role of accounting in business so that I have gained financial literacy to achieve my goals? Reflection

5. Private Enterprise and Capitalism • Businesses in the United States and most other countries operate in an economic system called private enterprise. • In this system, individuals (people like you and me) own companies (businesses) that produce and sell services and or goods for a profit. • These companies generally fall into three categories: service, merchandising, and manufacturing.

6. Service Companies • Service companies perform services or activities that benefit individuals or business customers. • Companies like A Great Cut, Midas Muffler Shops, Merry Maids, UPS, and many professional practices such as accounting, law, architecture, and medicine, are all service companies.

7. Merchandising Companies • Merchandising companies purchase goods (sometimes referred to as merchandise or products) for resale to their customers. • Some merchandising companies are wholesalers, meaning they sell their goods to retailers or other commercial users. Examples include plumbing supply stores, electrical suppliers, or beverage distributors.

8. Merchandising Companies • Some merchandising companies are retailers, meaning they sell their goods directly to consumers like you and me. • Most of the businesses you come in contact with are probably retailers, such as JC Penney, Toys ’R’ Us, amazon.com, and Circuit City.

9. Manufacturing Companies • Manufacturing companies make their products and then sell these products to their customers. • Unlike merchandisers who purchase ready-to-sell merchandise, a manufacturer has no goods to sell until they are manufactured. • Examples of manufacturing companies include General Motors, Black & Decker, and Dell Corporation.

10. A company owner’s idea for a business. • The willingness of the company’s owner to take a risk in starting a business. • Abilities of the company’s owners and employees to use capital and to produce and sell goods or services. Entrepreneurship • Entrepreneurship is a combination of three factors:

11. Investing his/her own money into the business for a greater future return or finding other investors to do the same. • Borrowing money from a bank or other lending sources (creditors). Since borrowings have specific repayment schedules, they creates more risk for the business. Sources of Capital • Entrepreneurs can raise capital in two ways:

12. Business Organizations • Business organizations or companies are a significant aspect of the U.S. and world economies. • A company may be organized as a sole proprietorship, partnership, or a corporation. • Each of these business forms has its advantages and disadvantages.

13. Business Organizations Exhibit 1-3

14. Regulatory Environment • Many different laws and authorities regulate the business environment, covering issues from consumer protection, environmental protection, employee safety, hiring practices, and taxes. • Companies must comply with different sets of regulations depending on the nature of their business.

15. Integrated Accounting System • An integrated accounting system is a means by which accounting information about a company’s activities is identified, measured, recorded, and summarized so that it can be communicated to users. • External users include the many diverse groups of people outside the company. • Internal users include the managers and employees within the company.

16. Managerial Accounting Information • Management accounting information helps managers plan, operate, and evaluate a company’s activities. • This information has an internal focus and is free from the restrictions of regulatory bodies interested in how companies report to external users.

17. Financial Accounting Information • Financial accounting information is organized for the use of interested people outside of the company. • This information has an external focus and must follow the guidelines of generally accepted accounting principles, standards for preparing financial accounting information.

18. Basic ManagementAccounting Reports • Budgets: A financial plan that quantifies managers’ plans and the impact on the company’s operating activities and financial position. • Cost Analysis: The process of determining and evaluating costs of specific products or activities. • Manufacturing Cost Reports: Cost reports that help monitor and evaluate a company's operations to determine if its plans are being achieved.

19. Generally AcceptedAccounting Principles (GAAP) • Accepted principles, procedures, and practices that companies use for financial accounting and reporting in the United States. • These principles, or “rules” must be followed in the external reports of companies that sell stock to the public in the United States and by many other companies as well. • GAAP covers a wide range of issues from how to account for inventory, buildings, income taxes, as well as specialized industry guidelines.

20. Basic Financial Statements • Financial statements are accounting reports used to summarize and communicate financial information about a company. • A company’s integrated accounting system produces three major statements: the income statement, the balance sheet, and the cash flow statement, as well as a supporting statement called the changes in owners’ equity. • Each financial statement summarizes specific information and serves specific purposes.

21. Income Statement

22. Balance Sheet

23. Cash Flow Statement

24. ENRON Ethics in Business and Accounting • A company’s financial statements are meant to convey information about the company to internal and external users in order to facilitate decision-making. • If the information in the financial statements does not convey a realistic picture, the decisions based on this information can have disastrous consequences.

25. Code of Ethics • The American Institute of Certified Public Accountants (AICPA) has a professional code of ethics that guides the professional work of CPAs. • The Institute of Management Accountants (IMA) and the International Federation of Accountants (IFAC) have a code similar to the AICPA. • Many companies have codes or statements of company and business ethics to guide the actions and behaviors of their employees.