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Accounting Fundamentals

Accounting Fundamentals. Dr. Yan Xiong Department of Accountancy CSU Sacramento The lecture notes are primarily based on Reimers (2003). 7/11/03. Chapter 1 Business Processes. Agenda Purpose of a Business and Types of Businesses Ownership Structure of Businesses Business Processes

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Accounting Fundamentals

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  1. Accounting Fundamentals Dr. Yan Xiong Department of Accountancy CSU Sacramento The lecture notes are primarily based on Reimers (2003). 7/11/03

  2. Chapter 1 Business Processes Agenda Purpose of a Business and Types of Businesses Ownership Structure of Businesses Business Processes The Accounting Equation Four Basic Financial Statements

  3. “ Accounting is process, process, process” Daniel O’ Leary Accounting Professor and Author University of Southern California

  4. Purpose of a Business Add Value Make a Profit

  5. “The Firm” Simple Model of a Business Value added conversion INPUTS (Give) OUTPUTS (Get) Acquisition/Payment Cycle Sales/Collection Cycle Capital (financing) Property, Plant, Equipment Raw Materials Labor Inventory Goods & Services Delivery of Product or Service

  6. What are Business Processes? • Series of activities that a company performs to achieve its goals. • ACQUISITION / PAYMENT: acquire, maintain, and pay for the resources needed by the organization. • CONVERSION: convert the resources acquired into goods and/or services. • SALES / COLLECTIONS: sell and deliver goods and/or services to customers and to collect payment.

  7. Types of Businesses • Service company • provides a service for customers • Sales company • Special case: financial services • Merchandising--buys goods and resells them to other businesses (wholesale) or to final customers (retail) • Manufacturing--makes a product and sells it to other businesses (wholesale) or to final consumers (retail)

  8. Examples: • Service • accountants, attorneys, physicians • Financial Service • Citicorp, Merrill Lynch, American Express • Merchandising • Wal-Mart, Safeway, The Gap • Manufacturing • General Motors, 3M, Reynolds Metals [Obviously, some businesses provide more than one of the functions listed above]

  9. Ownership Structure of Businesses Sole Proprietorship--a single owner business Partnership--a multiple-owner business Corporation--a business whose ownership is divided into "shares" and may be owned by a large number of people

  10. Corporations • A corporation is a popular form of business because . . . • It is simple for individuals to purchase small amounts of stock. • It allows for an easy transfer of ownership through established markets, like the New York Stock Exchange. • It provides stockholders with limited liability.

  11. Corporations • Because a corporation is a separate legal entity, it can . . . • Own assets. • Incur liabilities. • Sue and be sued. • Enter into contracts independent of the stockholder owners. • Many Americans own stock through a mutual fund or pension program.

  12. Characteristics of Different Forms of Business Organization Issues in deciding between sole proprietorship, partnership, or corporation • Personal liability • Taxation • Transfer of ownership • Ability to raise capital • Government regulation

  13. What Do All Business have in Common? • No matter what the ownership structure of a business, they all have at least two main business processes: • Acquisition/Payment • Sales/Collection

  14. Activity PossibleDocument(s) Acquisition/payment process Identify need for good/services Purchase Requisition Identify vendor Order goods/services Purchase Order Receive and Inspect Goods Receiving Report Pay for Goods and/or Services Check Requisition Check

  15. Sales/collection process • Customer places an order (Customer order) • Customer’s credit is approved • Warehouse selects goods for shipment (Picking slip) • Goods are shipped (Packing slip and Shipping notice) • Customer is billed for goods (Invoice) • Payment for goods is received (Check)

  16. Business Transactions • Business transactions are exchanges. • The two transactions that make up an “exchange” are the GIVE part and the GET part. • The exchange occurs between the business entity and a person or business external to the entity. • The business gives something and then gets something in return.

  17. Resources, Events, and Agents • We can model an exchange with these three components: • the resources are the things being exchanged (goods or services for money) • the event describes the business action (e.g. cash disbursement, sale, etc.) • the agents are the people involved in the exchange (e.g., the customer)

  18. Tom’s Wear T-shirt Company AGENT AGENT Acquisition and Payment for T-shirts GIVE Cash Disbursement EVENT Cash Resource Cash Resource EVENT Purchase T-shirt Resource T-shirt Resource GET

  19. Tom’s Wear Advertising Company AGENT AGENT Acquisition and Payment for a Service GIVE Cash Disbursement EVENT Cash Resource Cash Resource EVENT Purchase Advertisement Resource Advertisement Resource GET

  20. Tom’s Wear Customer AGENT AGENT Sales and Collections GIVE Sale T-shirt Resource T-shirt Resource EVENT EVENT Cash Collection Cash Resource Cash Resource GET

  21. Who needs accounting information? • Management • Those with direct financial interest • Current or potential investors • Currentor potential creditors C) Those with an indirect financial interest • Tax Authorities • Regulatory Agencies • Economic Planners • Labor unions, financial advisors, others. D) Employees

  22. Financial Accounting Information Information related to: Various views of the data: Financial data for external reports Sales The Company’s Information System Purchases Product information Collections Customer and vendor information Payments

  23. The Accounting Equation Assets = Claims Assets = Liabilities + Equity • Asset: something of value • Liability: something owed (creditors’ share of the assets) • Equity: what remains (owner’s share of the assets)

  24. Equity: The Owner’s Share • There are two sources of equity • equity “contributed” by owners • equity “earned” by operations • Expanded accounting equation: CONTRIBUTED CAPITAL RETAINED EARNINGS + + ASSETS = LIABILITIES

  25. Equity: The Owner’s Share Expanded accounting equation: CONTRIBUTED CAPITAL RETAINED EARNINGS + + ASSETS = LIABILITIES Together, these are called Shareholders’ Equity, Stockholders’ Equity, or Owners’ Equity. They are all names for the same thing--the owners’ claims to the firm’s assets.

  26. Four Basic Financial Statements • Balance Sheet Assets = Liabilities + Equity • Income Statement Revenues - Expenses = Net income • Statement of Changes in Owner’s Equity Beginning equity + Contributions + Net income - Distributions = Ending equity • Statement of Cash Flows Cash inflow - Cash outflow = Net cash flow

  27. Dates of Financial Statements are Important! • Balance sheet is “AS OF…” or “AT” a particular date, sometimes called a “snapshot” in time. • Income statement • Statement of changes in owner’s equity • Statement of cash flows • These last three cover a period of time, and thus are “FOR THE PERIOD ENDING”

  28. Date Jan. 1 Transactions Tom contributes $5,000 of his own money to the business. Acquiring Financing for a Business Assets = Liabilities + Owner’s Equity Contributed Capital + Retained Earnings +5,000 cash +5,000 common stock

  29. Date Jan. 1 Transactions Tom’s Wear borrows $500 from Tom’s mom. Acquiring Financing for a Business Assets = Liabilities + CC + Retained Earnings +500 cash + 500 N/P

  30. Date Jan. 1 Transactions Tom contributes $5,000 of his own money to start the business. Tom’s Wear borrows $500 from Tom’s mom. Acquiring Financing for a Business Assets = Liabilities + CC + Retained Earnings +5,000 cash +5,000 common stock +500 cash + 500 N/P

  31. Date Jan. 5 Transactions Tom’s Wear buys 100 T-shirts for $400 cash. Acquiring Inventory

  32. Date Jan. 5 Transactions Tom’s Wear buys 100 T-shirts for $400 cash. Acquiring Inventory Assets = Liabilities + CC + RE (400) cash +400 inventory

  33. Date Jan. 10 Transactions Tom’s Wear pays $50 for advertising. Acquiring a Service Assets = Liabilities + CC + RE (50) cash (50) expenses

  34. Date Jan. 20 Transactions Tom’s Wear sells 90 of the T-shirts to friends for cash, $10 each. Sales and Collection

  35. Date Jan. 20 Transactions Tom’s Wear sells 90 of the T-shirts to friends for cash, $10 each. Sales and Collection Assets = Liabilities + CC + RE +900 cash +900 revenue

  36. Date Jan. 20 Transactions Tom’s Wear sells 90 of the T-shirts to friends for cash, $10 each. What else happens along with the sale? An expense…the cost of the goods sold. Assets = Liabilities + CC + RE +900 cash +900 revenue (360) inventory (360) expense Special expense called cost of goods sold 90 shirts x $4 each

  37. Date Jan. 30 Transactions Tom’s Wear repays the debt of $500 plus $5 interest. Payment for the acquired financing

  38. Date Jan. 30 Transactions Tom’s Wear repays the debt of $500 plus $5 interest. Payment for the acquired financing Assets = Liabilities + CC + RE (505) cash (500) N/P

  39. Date Jan. 30 Transactions Tom’s Wear repays the debt of $500 plus $5 interest. Payment for the acquired financing Assets = Liabilities + CC + RE (505) cash (500) N/P (5) expense Interest expense

  40. Date Jan. 31 Transactions Tom’s Wear pays a dividend to Tom, the owner, for $100. Payment for the acquired financing

  41. Date Jan. 31 Transactions Tom’s Wear pays a dividend of $100. Payment for the acquired financing Assets = Liabilities + CC + RE (100) cash (100)dividends

  42. Tom’s Wear pays a dividend of $100. Tom’s Wear makes a distribution to Tom, the owner, for $100. In a corporation, a distribution to the owners is called a dividend. Payment for the acquired financing = Assets = Liabilities + CC + RE (100) cash (100) dividend

  43. Assets = Liabilities + Equity 1. +5,000 cash +$5,000 common stk. 2. +500 cash + 500 notes payable 3. -400 cash +400 inv. 4. -50 cash - 50 expense 5. +900 cash + 900 revenue -360 inventory - 360 CGS 6. -505 cash -500 notes payable - 5 interest exp. 7, -100 cash - 100 dividend 5,385 0 5,385

  44. Tom’s Wear, Inc.Income StatementFor the month ended January 31, 2001 REVENUE - EXPENSES = NET INCOME

  45. Assets = Liabilities + Equity 1. +5,000 cash +$5,000 common stk. 2. +500 cash + 500 notes payable 3. -400 cash +400 inv. 4. -50 cash - 50 expense 5. +900 cash + 900 revenue -360 inventory - 360 CGS 6. -505 cash -500 notes payable - 5 interest exp. 7, -100 cash - 100 dividends 5,385 0 5,385 These are the revenues and expenses:

  46. Assets = Liabilities + Equity 1. +5,000 cash +$5,000 common stk. 2. +500 cash + 500 notes payable 3. -400 cash +400 inv. 4. -50 cash - 50 expense 5. +900 cash + 900 revenue -360 inventory - 360 CGS 6. -505 cash -500 notes payable - 5 interest exp. 7, -100 cash - 100 dividends 5,385 0 5,385 Net Income = $485

  47. Tom’s Wear, Inc.Income StatementFor the Month Ended Jan. 31, 2001 Revenue Sales $900 Expenses Cost of sales 360 Advertising 50 Interest 5 Total expenses 415 Net income $485

  48. Tom’s Wear, Inc.Statement of Changes in Owner’s EquityFor the month ended Jan. 31, 2001 Beginning CC $ 0 Common stock issued 5,000 Total Contributed Capital $ 5,000 Beginning RE $ 0 Net income Dividends Ending RE Total Owners’ Equity

  49. Tom’s Wear, Inc.Statement of Changes in Owner’s EquityFor the month ended Jan. 31, 2001 Beginning CC $ 0 Common stock issued 5,000 Total Contributed Capital $ 5,000 Beginning RE $ 0 Net income 485 Dividends (100) Ending RE $ 385 Total Owners’ Equity $5,385

  50. Assets = Liabilities + Equity 1. +5,000 cash +$5,000 common stk. 2. +500 cash + 500 notes payable 3. -400 cash +400 inv. 4. -50 cash- 50 expense 5. +900 cash+ 900 revenue -360 inventory - 360 CGS 6. -505 cash -500 notes payable - 5 interest exp. 7. -100 cash - 100 dividends 5,385 0 5,385 Net Income = $485

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