Download Accounting and the Business Environment

Chapter 1
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Introduction review
The accounting profession and the
organizations that govern it
Types of business organizations
Characteristics and organization of a
corporation
The financial report that is at heart of the
entire accounting universe
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Accounting concepts and principles
The balance sheet: the accounting equation,
assets, liabilities, and equity.
Use the accounting equation to analyze
transactions
Prepare financial statements
Use financial statements to evaluate business
performance
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1
Introduction review
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Accounting is “the language of business.”
The information system that:
Measures business activity
Processes the data into reports
Communicates the results to decision makers
Presents information in monetary terms
Knowing how to speak this language makes you
a better decision maker, no matter what career
path you choose in business.
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All numbers in thousands
Revenues
Amounts earned by delivering
goods or services to customers
Expenses
Decreases in equity that occur
from using assets or increasing
liabilities in the course of
delivering goods or services to
customers
Net Income (Net Loss)
Wealth created (consumed) by
revenue and expense
transactions.
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2
The accounting profession and
the organizations that govern it
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Lucrative career with many opportunities
Certified Public Accountants (CPAs)
Meet education and/or experience requirements
Pass qualifying exam
Certified Public
Accountants, or CPAs
Certified Management
Accountants, or CMAs
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• Licensed professional accountants
who are approved to serve the
general public
• Certified professionals in
accounting for a single company.
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CalCPA, Silicon Valley Chapter
http://www.calcpa.org
Career building resources
Continuing education
Professional networking &
involvement
Scholarships
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SEC
FASB
• Securities and Exchange Commission
• U.S. governmental agency that oversees U.S.
financial markets.
• Financial Accounting Standards Board
• A privately funded organization, formulates
accounting standards
AICPA
• American Institute of Certified Public Accountants
• Private organization of public accountants
• Source for ethical standards in many areas
PCAOB
• Public Company Accounting Oversight Board
• Oversees auditing standards and practices
IASB
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• International Accounting Standards Board
• Publishes the International Financial Reporting
Standards, the international accounting rule book
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Why Audit:
Businesses want to look good
Investors want reliable financial information
Help uphold the faithful representation principle
SEC requires companies to have financial statements
examined by independent accountants
Auditors provide an opinion on financial statements
U.S. Government crackdown on fraud:
Created the Public Company Accounting Oversight
Board (PCAOB)
Passed the Sarbanes-Oxley Act (SOX)
A variety of Post-Madoff reforms
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3
Types
of business organizations
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Proprietorship
Partnership
Corporation
LLC and LLP
Not-for-profit
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Characteristics and organization
of a corporation
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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
Bylaws are the rule book that guides the
corporation.
Corporations begins to exist when stock is
issued
Stockholders vote on who will serve on Board of
Directors
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Limited personal liability for
stockholders.
Fund-raising!
Transferability of ownership.
Continuity of existence.
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Greater regulation.
Double taxation.
Separation of ownership and
management.
Cost of formation.
www.corporate.com
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Name two benefits of
incorporating.
Name two negatives of
incorporating.
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Loads of Sole props, but not so much production
Few Corporations, but producing loads of sales
http://www.bizstats.com/reports/sales-structure.php
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You
Youown
and
areown
700
a manage
doctor
other
You
You
&
a
people
with own
your
aown
chain
askateboard
small
fruit-stand
park
of craft
practice
stores
Incorporate
Sole Proprietorship
or Partnership
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Accounting concepts and
principles
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Generally Accepted Accounting Principles
Guidelines that govern accounting
Based on a conceptual framework
Goals include:
Provide useful information for investment and lending
decisions
Must be relevant, reliable, and comparable
US GAAP vs. IFRS
Rules based vs. principles based
IFRS demonstrates a user bias
Convergence and conversion
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Entity Concept
• A business is separate from its owners
Faithful Representation Principle
• Accounting information is complete, neutral, and free
from material error
Cost Principle
• Assets are recorded at purchase price
• US GAAP reflects decreases, IFRS can reflect increases
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Going-Concern
• Assumption that business will remain in
operation for the foreseeable future
Stable Monetary Unit Concept
• In the U.S. amounts are recorded in dollars
• The dollar is considered a stable unit of
measure
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The Balance Sheet: the
accounting equation, assets,
liabilities, and equity
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ASSETS
Economic
Resources
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LIABILITIES
EQUITY
Claims to Economic
Resources
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Economic resources
Benefit the business in the future
Examples:
Cash
Accounts receivable
Merchandise inventory
Furniture
Land
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Liabilities
Equity
Debts payable to outsiders
Examples:
Accounts payable
Salaries payable
Bank loans
Mortgages
Unearned revenue
Owners’ claims to the
assets of the business
In a corporation,
stockholders’ equity
Two forms:
Earned capital
Eg: Retained earnings
Paid-In Capital
Eg: Capital stock
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Use the accounting equation to
analyze transactions
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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
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Write up basic accounting equation
Create initial transactions to prepare for business
Record revenue & expense transactions
Translate to reports
If this doesn’t get too messy, we can make some
simple financial statements from the data.
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Prepare financial statements
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Income
Statement
Balance
Sheet
Statement of
Retained
Earnings
Statement of
Cash Flows
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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:
Insurance expense
$ 8,000 Accounts receivable
$ 8,000
Cash
37,000 Note payable
12,000
Accounts payable
7,000 Retained earnings
Advertising expense
3,000 Salary expense
?
25,000
Service revenue
80,000 Equipment
50,000
Dividends
31,000 Common stock
29,000
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
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Studio Photography, Inc.
Income Statement
Year Ended December 31, 2012
Revenue:
Service revenue
Expenses:
Salary expense
Insurance expense
Advertising expense
Total expenses
Net income
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$ 80,000
$ 25,000
8,000
3,000
36,000
$ 44,000
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Studio Photography, Inc.
Statement of Retained Earnings
Year Ended December 31, 2012
Retained earnings, December 31, 2011
Add: Net income
$ 16,000
44,000
Subtotal
Less: Dividends
Retained earnings, December 31, 2011
$ 60,000
(13,000)
$ 47,000
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Studio Photography, Inc.
Balance Sheet
December 31, 2012
Assets
Cash
Accounts receivable
Equipment
Liabilities
$37,000
8,000
50,000
Accounts payable
$ 7,000
Note payable
12,000
Total liabilities
19,000
Stockholders’ Equity
Common stock
Retained earnings
Total assets
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$95,000
$29,000
47,000
Total stockholders’
equity
76,000
Total liabilities and
stockholders’ equity
$95,000
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Use financial statements to evaluate business
performance
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Income
Statement
Demonstrates
profitability
Statement of
Retained
Earnings
Balance Sheet
Shows changes
in retained
earnings
Demonstrates
economic
resources
as well as
debts the
company owes
www.yahoo.com/finance
Income statement: Earnings power
Balance Sheet: Financial strength/standing
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Accounting is the language of business. Financial
statements report a company’s activities in monetary
terms.
Different users—including individuals, business
owners, managers, investors, creditors, and tax
authorities—review a company’s financial statements
for different reasons. Each user’s goal will determine
which pieces of the financial statements he or she will
find most useful.
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Most U.S. businesses follow generally accepted
accounting principles (GAAP). If the company is
publicly traded, then it must also follow SEC
guidelines. If the company operates internationally,
then international financial reporting standards
(IFRS) will apply. The goal is that, eventually, all
public U.S. companies will report using IFRS rules.
There are five main forms of business organizations:
proprietorships, partnerships, corporations,
LLPs/LLCs, and not-for-profits. Each is unique in its
formation, ownership, life, and liability exposure.
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Corporations are formed with a specific state by
issuance of a charter. The stockholders own the
corporation, but they have no liability for the
corporation’s actions.
Corporations usually raise capital more easily than
other forms of business, but have the disadvantage of
additional regulation and additional taxes.
The accounting concepts are the underlying
assumptions used when recording financial
information for a business. Think of the concepts like
rules of a game. You have to play by the rules.
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The accounting equation must always equal. That is,
Assets (what you own) must equal Liabilities (what
you owe) + Equity (net worth). In a corporation,
equity is composed of paid-in capital (by outsiders)
and retained earnings (earnings kept for use by the
company).
The accounting equation is Assets = Liabilities +
Equity. Every business transaction affects various
parts of the equation, but after each transaction is
recorded, the equation must ALWAYS balance
(equal).
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Financial statements are prepared from the ending
balances of each account. Each financial statement
shows a different view of the company’s overall
results.
Financial statements are prepared from the
transaction analyses (summary of events) reported
in each account (Exhibit 1-6) in the order shown in
Exhibit 1-7. No one financial statement shows
everything about a company. It is the financial
statements AND the relationships the statements
show that give users the overall picture for a
specific company.
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