Download Chapter 1 Uses of Accounting Information and the Basic Financial

Principles of Accounting
2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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1
Chapter 1
Uses of Accounting
Information and
the Financial
Statements
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2
LEARNING OBJECTIVES
1. Define accounting, identify business goals
and activities, and describe the role of
accounting in making informed decisions.
2. Identify the many users of accounting
information in society.
3. Explain the importance of business
transactions, money measure, and separate
entity to accounting measurement.
4. Identify the three basic forms of business
organization.
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3
LEARNING OBJECTIVES
(continued)
5. Define financial position, state the accounting
equation, and show how they are affected by
simple transactions.
6. Identify the four financial statements.
7. State the relationship of generally accepted
accounting principles (GAAP) to financial
statements and the independent CPA’s report,
and identify the organizations that influence the
GAAP.
8. Define ethics and describe the ethical
responsibilities of accountants.
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4
Accounting as an Information System
OBJECTIVE 1
Define accounting, identify business
goals and activities, and describe
the role of accounting in making
informed decisions.
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5
 Today’s
accountant focuses on the
ultimate needs of decision makers who
use accounting information, whether
those decision makers are inside or
outside the business.
“is not an end in itself,” but is
an information system that measures,
processes, and communicates financial
information about an identifiable
economic entity.
 Accounting
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6
 Accounting
provides a vital service by
supplying the information that decision
makers need to make reasoned choices
among alternative uses of scarce
resources in the conduct of business
and economic activities.
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7
Accounting
is a link between
business activities and decision
makers.
 Accounting
measures business activities by
recording data about them for future use.
 The data are stored until needed and then
processed to become useful information.
 The information is communicated, through
reports, to decision makers.
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8
Data about business activities are the
input to the accounting system.
Useful information for decision makers
is the output.
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9
Accounting as an Information System
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10
Business Goals, Activities, and
Performance Measures

A business is an economic unit that aims to
sell goods and services to customers at
prices that will provide an adequate return
to its owners.

Businesses, though diverse, have similar
goals and engage in similar activities.
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11
Business Goals
Profitability
A business must take in enough money
to pay all the costs of doing business, with
enough left over as profit for the owners
to want to stay in the business.
Liquidity
A business must have enough cash available to pay
debts when they are due.
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12
Business Goals and Activities
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13
Business Activities
Financing Activities.
Obtaining capital from owners and creditors.
Repaying creditors and paying a return to
owners.
Investing Activities.
Spending the capital it receives in ways that are
productive and will help the business achieve
its objectives.
Buying and selling assets to be used in the
business.




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14
Business Activities (continued)
Operating Activities.
 Selling goods and services to
customers.
 Employing managers and workers.
 Buying and producing goods and
services.
 Paying taxes.
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15
Performance Measures
Indicate whether managers are achieving
their business goals and if they are
managing business activities well.
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16
Performance Measures
Performance measures must align with business goals:
Performance Measure
Earned income.
Goal
Profitability.
Cash flow.
Liquidity.
Ratio of expenses to revenues.
Operating
performance level.
Financing
performance level.
Ratio of money owed to total
resources controlled.
Managers should understand and be motivated by
these measures.
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17
Financial and Management Accounting
Accounting’s role of assisting decision
makers by measuring, processing, and
communicating information is usually
divided into two categories:
1. Management accounting.
2. Financial accounting.
The two may be distinguished by the
principal users of their information.
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18
Management Accounting

Is oriented toward the needs of
internal decision makers.

Provides managers and employees
with information regarding how they
have done in the past and what they
can expect in the future.
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19
Financial Accounting

Is oriented toward the needs of external
decision makers.

Provides information in the form of
financial statements to evaluate how well
the business has achieved its goals.

Financial statements report directly on
the goals of profitability and liquidity.

Financial statements are used extensively
both inside and outside a business to
evaluate the business’s success.
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20
Processing Accounting
Information
Accounting versus bookkeeping




Bookkeeping is the mechanical and repetitive
process of recording financial transactions and
keeping financial records.
Bookkeeping is a small part of accounting.
Accounting includes the design of an
information system that meets user’s needs.
Accounting goals are the analysis,
interpretation, and use of information.
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21
Computers are used extensively in
accounting as a tool for the accountant.
A business’s information needs are
organized into a Management Information
System (MIS).


An MIS consists of interconnected
subsystems.
The Accounting Information System (AIS) is
the most important subsystem.
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22
Discussion
Q.
What is the difference between
profitability and liquidity?
A.


Profitability means earning enough
income to attract and hold investment
capital.
Liquidity means being able to pay debts
when they fall due.
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23
Decision Makers: The Users of
Accounting Information
OBJECTIVE 2
Identify the many users of
accounting information in society.
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24
The Users of Accounting Information
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25
Decision Makers
The people who use accounting information
to make decisions fall into three categories:
1.
Management
2.
Outside users with a direct financial
interest.
3.
People, organizations, and agencies with an
indirect financial interest.
These categories apply both to profitoriented ventures as well as government
and not-for-profit organizations.
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26
Management
Requires financial information to carry
out its basic functions.
1.
Financing the business.
2.
Investing the resources of the business.
3.
Producing goods and services.
4.
Marketing goods and services.
5.
Managing employees.
6.
Providing information to decision makers.
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27
Outside Users with
a Direct Financial Interest

Investors

Creditors
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28
People, Organizations, and Agencies with
an Indirect Financial Interest
 Tax Authorities.
 Regulatory Agencies.
 Labor
Unions.
 Investment Advisors.
 The Financial Press.
 Customers and Consumer
Groups.
 Economic Planners.
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29
Discussion
Q. Which decision makers use accounting
information?
A. Three groups of decision makers use accounting
information:
1.
Those who manage a business.
2.
Those outside a business enterprise who have a
direct financial interest in the business.
3.
Those people, organizations, and agencies that
have an indirect financial interest in the
business.
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30
Accounting Measurement
OBJECTIVE 3
Explain the importance of business
transactions, money measure, and
separate entity to accounting
measurement.
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31
Four Basic Questions
1.
2.
3.
4.
What is measured?
When should the measurement
be made?
What value should be placed on
what is measured?
How should what is measured
be classified?
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32
What Is Measured?
Business transactions:
 Economic
events that affect the
financial position of a business entity.
Transactions are the raw material of
accounting reports.
 Transactions must relate directly to a
business entity.

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33
Money Measure.
 Money
is the only factor common to all
business transactions.
 The monetary unit a business uses
depends on the country in which the
business resides.
 Exchange rates translate one currency to
another.
The Concept of Separate Entity.
 A business
is a separate entity, distinct
from its creditors and customers and from
its owner or owners.
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34
Discussion
Q. Tell whether each of the following words or
phrases relates most closely to a:
(a) business transaction,
(b) separate entity, or
(c) money measure.
1. Partnership
2. U.S. dollar
3. Payment of an expense
4. Corporation
5. Sale of an asset
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35
A.
1. Partnership: (b)
KEY
(a) business
transaction
(b) separate
entity
(c) money
measure
2. U.S. dollar: (c)
3. Payment of an expense: (a)
4. Corporation: (b)
5. Sale of an asset: (a)
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36
Forms of Business Organization
OBJECTIVE 4
Identify the three basic forms of
business organization.
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37
Forms of Business Organization
Sole
Proprietorship.
Partnership.
Corporation.
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38
Sole Proprietorships
 Owned
by one person.
 Records should be kept separate from
owner’s personal interests.
 Legally same economic unit as owner.
 Unlimited liability.
 Ends when owner wants it to, or owner dies.
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39
Partnerships
 More
than one owner.
 Unincorporated association, not legally
separate from owners.
 Unlimited liability.
 Mutual agency.
 Ends when ownership changes, e.g partner
leaves or dies.
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40
Corporations
 One
or more owners (stockholders.)
 Legally separate entity from owners.
 Owners can be separate from managers.
 Limited liability.
 Unlimited life.
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41
Number and Receipts of U.S. Proprietorships,
Partnerships, and Corporations, 1997
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42
Discussion
Q. How do sole proprietorships, partnerships,
and corporations differ?
A.

A sole proprietorship is a business
owned by one individual.

A partnership is similar in most
respects to a proprietorship except
that more than one owner is involved.

A corporation is an economic unit that
is legally separate from its owners.
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43
Financial Position and the
Accounting Equation
OBJECTIVE 5
Define financial position,
state the accounting equation, and
show how they are affected by
simple transactions.
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44
Financial Position
Economic Resources
= Equities.
= Creditors’ Equities + Owner’s Equity.
Assets = Liabilities
+ Owner’s Equity.
The Accounting Equation
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45
Assets
Assets are economic resources
owned by a business that are
expected to benefit future
operations.



Monetary items.
Nonmonetary physical things.
Nonphysical things.
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46
Liabilities
Liabilities are present obligations of a
business to pay cash, transfer assets, or
provide services to other entities in the
future.
Liabilities are debts recognized by law.
Creditors must be paid before
stockholders.
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47
Owner’s Equity
the
claims by the owner to the assets of
the business.
the residual equity that remains after
deducting liabilities from assets.
Owner’s Equity = Assets - Liabilities.
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48
Four Types of Transactions That
Affect Retained Earnings
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49
Net Income / Loss
Revenues > Expenses
Net Income
Revenues < Expenses
Net Loss
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50
Some Illustrative
Transactions
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51
T1. Owner’s Investments
Assets
J.S.,
Capital
Cash
Beginning
Balance
Liabilities
Owner’s
Equity
$0
$0
T1.
+$50,000
+$50,00
0
Ending
Balance
$50,000
$50,000
$50,000
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$50,000
52
T2. Purchase of Assets with Cash
Assets
Cash
Beginning
Balance
$50,000
T2.
-35,000
Ending
Balance
$15,000
Liabilities
Land
Building
Owner’s
Equity
J.S.,
Capital
$50,000
+$10,000 +$25,000
$10,000
$25,000
$50,000
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$50,000
$50,000
53
T3. Purchase of Assets by
Incurring a Liability
Assets
Cash
Beginning
Balance
Supplies
$15,000
T3.
Ending
Balance
Liabilities
Land
$10,000
Accounts
J.S.,
Building Payable Capital
$25,000
+$500
$15,000
$500
Owner’s
Equity
$50,000
+$500
$10,000
$25,000
$50,500
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$500 $50,000
$50,500
54
T4. Payment of a Liability
Assets
Cash
Beginning
Balance
Supplies
$15,000
T4.
-200
Ending
Balance
$14,800
Liabilities
$500
Land
$10,000
Owner’s
Equity
Accounts
J.S.,
Building Payable Capital
$25,000
$500 $50,000
-200
$500
$10,000
$25,000
$50,300
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$300 $50,000
$50,300
55
T5. Revenues Earned
Commission Received in Cash
Assets
Cash
Beginning
Balance
$14,800
T5.
+1,500
Ending
Balance
$16,300
Liabilities
Supplies
$500
Land
$10,000
Owner’s
Equity
Accounts
J.S.,
Building Payable Capital
$25,000
$300 $50,000
+1,500
$500
$10,000
$25,000
$51,800
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$300 $51,500
$51,800
56
T6. Revenues Earned Commission
with Deferred Receipt
Assets
Cash
Beginning
Balance
Suppli
es
$16,300
T6.
Ending
Balance
Accounts
Receivable
Liabilities
$500
Land
$10,000
Accounts
J.S.,
Building Payable Capital
$25,000
+$2,000
$16,300
$2,000
Owner’s
Equity
$300 $51,500
+2,000
$500
$10,000
$25,000
$53,800
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$300 $53,500
$53,800
57
T7. Collection of Accounts
Receivable
Assets
Cash
Accounts
Receivable
Beginning
Balance
$16,300
$2,000
T7.
+1,000
-1,000
Ending
Balance
$17,300
$1,000
Liabilities
Supplies
Land
Owner’s
Equity
Accounts
J.S.,
Building Payable Capital
$500 $10,000
$25,000
$300 $53,500
$500 $10,000
$25,000
$300 $53,500
$53,800
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$53,800
58
Expenses Incurred
T8. Paid Equipment Rental Expense
T9. Paid Wages Expense
Assets
Cash
Beginning
Balance
$17,300
Accounts
Receivable
Liabilities
Supplies
$1,000
Land
$500 $10,000
Owner’s
Equity
Accounts
J.S.,
Building Payable Capital
$25,000
$300 $53,500
T8.
-1,000
-1,000
T9.
-400
-400
Ending
Balance
$15,900
$1,000
$500 $10,000
$25,000
$52,400
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$300 $52,100
$52,400
59
T10. Utility Expense Incurred Current
Liability Recorded
Assets
Cash
Beginning
Balance
$15,900
Accounts
Receivable
Liabilities
Supplies
$1,000
Land
$500 $10,000
Accounts
J.S.,
Building Payable Capital
$25,000
T10.
Ending
Balance
Owner’s
Equity
$300 $52,100
+300
$15,900
$1,000
$500 $10,000
$25,000
$52,400
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-300
$600 $51,800
$52,400
60
T11. Owner’s Withdrawals
Assets
Cash
Beginning
Balance
$15,900
T11.
-600
Ending
Balance
$15,300
Accounts
Receivable
Liabilities
Supplies
$1,000
Land
$500 $10,000
Owner’s
Equity
Accounts
J.S.,
Building Payable Capital
$25,000
$600 $51,800
-600
$1,000
$500 $10,000
$25,000
$51,800
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$600 $51,200
$51,800
61
Communication Through
Financial Statements
OBJECTIVE 6
Identify the four financial statements.
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62
The Importance of
Financial Statements
 Financial
statements are the primary
means of communicating important
accounting information to users.
 Financial statements represent models
of the business enterprise because they
show the business in financial terms.
 Financial statements are not perfect
pictures of the real thing.
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63
The Income Statement
 Summarizes
revenues earned and
expenses incurred over a period of
time.
 Is considered by many to be the
most important financial report
because it shows whether or not a
business achieved its profitability
goal.
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64
Shannon Realty
Income Statement
For the Month Ended December 31, 20xx
Revenues
Commissions Earned
Expenses
Equipment Rental Expense
$1,000
Wages Expense
400
Utilities Expense
300
Total Expenses
Net Income
Trace to the Statement of
Owner’s Equity
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$3,500
$1,700
$1,800
65
The Statement of Owner’s Equity
Shows
the change in the owner’s
capital over a period of time.
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66
Shannon Realty
Statement of Owner’s Equity
For the Month Ended December 31, 20xx
John Shannon, Capital, 12/1/xx
Add: Investments by John Shannon
Net Income for the Month
Subtotal
Less Withdrawals by John Shannon
John Shannon, Capital, 12/31/xx
$
$50,000
1,800
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0
51,800
$ 5 1,800
600
$ 51,200
67
The Balance Sheet
 Shows
financial position at a point in time.
 Is often called the statement of financial
position.
 Presents a view of the business as the
holder of resources, or assets, that are
equal to the claims against those assets.
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68
Shannon Realty
Balance Sheet
December 31, 20xx
Assets
Cash
Accounts Receivable
Supplies
Land
Building
$15,300
1,000
500
10,000
25,000
Total Assets
$51,800
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69
Shannon Realty
Balance Sheet
December 31, 20xx (continued…)
Liabilities
Accounts Payable
$600
Owner’s Equity
John Shannon, Capital
$51,200
Total Liabilities and Owner’s Equity $51,800
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70
The Statement of Cash Flows
 Focuses
on a company’s liquidity goal.
 Shows cash produced by operating a
business and important financing and
investing transactions that take place
during an accounting period.
 Is directly related to the other three
statements.
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71
Shannon Realty
Statement of Cash Flows
For the Month Ended December 31, 20xx
Cash Flows from Operating Activities
Net Income
Noncash Expenses and Revenues
Included in Income
Increase in Accounts Receivable
Increase in Supplies
Increase in Accounts Payable
$1,800
$(1,000)
(500)
600
Net Cash Flows from
Operating Activities
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(900)
$900
72
Shannon Realty
Statement of Cash Flows
For the Month Ended December 31, 20xx
(continued…)
Cash Flows from Investing Activities
Purchase of Land
($10,000)
Purchase of Building
(25,000)
Net Cash Flows from Investing
(35,000)
Activities
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73
Shannon Realty
Statement of Cash Flows
For the Month Ended December 31, 20xx
(continued…)
Cash Flows from Financing Activities
Investments by John Shannon
Withdrawals by John Shannon
$50,000
(600)
Net Cash Flows from
Financing Activities
Net Increase (Decrease) in Cash
Cash at Beginning of Month
Cash at End of Month
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49,400
$15,300
0
$15,300
74
Discussion
Q. Why is the balance sheet sometimes called
the statement of financial position?
A. Financial position consists of the economic
resources that belong to a business and the
claims against those resources as of a
certain date. This is the information shown
on the balance sheet.
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75
Generally Accepted
Accounting Principles
OBJECTIVE 7
State the relationship of generally
accepted accounting principles
(GAAP) to financial statements and
the independent CPA’s report, and
identify the organizations that
influence GAAP.
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76
Generally Accepted
Accounting Principles (GAAP)
Focus
on understandability of
financial statements.
Encompass
the conventions,
rules, and procedures
necessary to define accepted
accounting practice at a
particular time.
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77
Financial Statements, GAAP, and
the Independent CPA’s Report
Financial
statements are prepared
by management and may be
biased.
Financial statements are audited
by independent CPAs.
An audit ascertains that the
financial statements have been
prepared in accordance with
GAAP.
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78
Organizations That Influence
Current Practice
FASB.
AICPA.
GASB.
IASC.
IRS.
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79
Discussion
Q.
What are GAAP?
A.
GAAP are generally accepted accounting
principles; they are the “conventions,
rules, and procedures necessary to define
accepted accounting practice at a
particular time.”
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80
Discussion
Q.
Why are GAAP important to readers
of financial statements?
A.
GAAP ensure that the financial
statements will be understandable to
their users.
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81
Professional Ethics and the
Accounting Profession
OBJECTIVE 8
Define ethics and describe the ethical
responsibilities of accountants.
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82
What Are Professional Ethics?


A code of conduct that applies to the
practice of a profession.
Codes of conduct adopted by the
AICPA and each state.
 Responsibility to the public.
 Integrity.
 Objectivity.
 Independence.
 Due care.
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83
The Institute of Management Accountants’ (IMA)
Code of Professional Conduct
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Competency.
Confidentiality.
Integrity.
Avoidance of conflicts of interest.
Communication of information
objectively and without bias.
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Discussion
Q.
Discuss the importance of professional ethics
in the accounting profession.
A.
Professional ethics is a code of conduct that
applies to the practice of a profession. As
members of a profession, accountants have a
responsibility, not only to their employers
and clients but to society as a whole, to
uphold the highest ethical standards.
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OK, LET’S REVIEW . . .
1.
Define accounting, identify business goals
and activities, and describe the role of
accounting in making informed decisions.
2.
Identify the many users of accounting
information in society.
3.
Explain the importance of business
transactions, money measure, and separate
entity to accounting measurement.
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CONTINUING OUR REVIEW . . .
4.
Identify the three basic forms of
business organization.
5.
Define financial position, state the
accounting equation, and show how
they are affected by simple
transactions.
6.
Identify the four financial statements.
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AND FINALLY . . .
7.
State the relationship of generally
accepted accounting principles
(GAAP) to financial statements and
the independent CPA’s report, and
identify the organizations that
influence GAAP.
8.
Define ethics and describe the ethical
responsibilities of accountants.
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