1-1 PowerPointPresentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...

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PowerPointPowerPoint Presentation by Presentation by Douglas CloudDouglas Cloud

Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University

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F1311Accounting Accounting and and OrganizationsOrganizations

Financial Accounting

Ingram and Albright

6th edition

Information for DecisionsInformation for Decisions

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ObjectivesObjectivesObjectivesObjectives

Once you have completed this chapter, you should be able to—

Once you have completed this chapter, you should be able to—

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1. Identify how accounting information helps decision makers.


ContinuedContinuedContinuedContinued

2. Compare major types of organizations and explain their purpose.

3. Describe how businesses create value.4. Explain how accounting helps investors and

other decision makers understand businesses.

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5. Identify business ownership structures and their advantages and disadvantages.


6. Identify uses of accounting information for making decisions about corporations.

7. Explain the purpose and importance of accounting regulations.

8. Explain why ethics are important for businesses and accounting.

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11ObjectiveObjectiveObjectiveObjective

Identify how accounting information helps decision makers.

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Accounting information helps decision makers determine where they

have been, where they are, and where they are going.

Accounting information helps decision makers determine where they

have been, where they are, and where they are going.

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Maria and Stan decide to start a business selling purchased bakery

cookies to local grocery stores. They determine they can sell $12,000 of merchandise (cookies) each month.

Maria and Stan decide to start a business selling purchased bakery

cookies to local grocery stores. They determine they can sell $12,000 of merchandise (cookies) each month.

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They calculate their monthly cost.

Merchandise $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100

Merchandise $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100

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Profit $1,900Profit $1,900

They determine how much they expect to make from the business each month.

Merchandise sold $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100

Merchandise sold $ 8,000Wages 1,000Rent 600Supplies 300Utilities 200 Total $10,100

Costs

Sales of merchandise

$12,000

Sales of merchandise

$12,000

Sales

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Risk is uncertainty about an outcome, such as the amount of profit a business will earn.

Risk is uncertainty about an outcome, such as the amount of profit a business will earn.

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The purpose of accounting is to help people make decisions

about economic activities.

The purpose of accounting is to help people make decisions

about economic activities.

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Accounting can help with these decisions by providing

information about the results that owners and other decision makers should expect to occur.

Accounting can help with these decisions by providing

information about the results that owners and other decision makers should expect to occur.

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Stakeholders include—1. those who have an economic

interest in an organization and

2. those who are affected by its activities.

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An organization is a group of people who work together to—1. develop,2. produce, and3. distribute goods or service.

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22Compare major types of organizations and explain their purpose.

ObjectiveObjectiveObjectiveObjective

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Exhibit 3Exhibit 3Exhibit 3Exhibit 3 Types of Organizations

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Exhibit 4Exhibit 4Exhibit 4Exhibit 4 Transformation of Resources into Goods and Services

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The transformation, if it meets a need of society,

creates value because people are better off after the

transformation than before.

The transformation, if it meets a need of society,

creates value because people are better off after the

transformation than before.

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Exercise 1-4Exercise 1-4Exercise 1-4Exercise 1-4

Click the button to skip this exercise.

a. What type of organization provides goods or services without the intent of making a profit? Examples include the IRS and the United Way.

1. Merchandising (or retail) companies2. Manufacturing companies3. Service companies4. Governmental and nonprofit

Press “Enter” or click left mouse button for answer.

If you experience trouble making the button work, type 23 and press “Enter.”

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b. What type of organization produces goods that are sold to consumers or to merchandising companies? Examples include Ford Motor Company and PepsiCo.


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c. What type of organization sells goods to consumers that are produced by other companies? Examples include Wal-Mart and Sears.


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d. What type of organization sells services rather than goods? Examples include H&R Block and Delta Air Lines.


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33Describe how businesses create value.


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Creating Value Creating Value Creating Value Creating Value

A market is any location or process that permits resources

to be bought and sold.

A market is any location or process that permits resources

to be bought and sold.

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Accounting measures the increase in value created by a transformation as the

difference between the total price of goods and service sold and the total

costs of resources consumed in developing, producing, and selling the

goods and services.

Accounting measures the increase in value created by a transformation as the

difference between the total price of goods and service sold and the total

costs of resources consumed in developing, producing, and selling the

goods and services.

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Sales Price of Box of Cookies

Total Cost of Resources

Consumed to Produce and Make a Box of Cookies

Available

Value Added

$3.50 $3.00 $0.50– =

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Profit is the difference between the price a seller receives for goods or

services and the total cost of all resources consumed in developing,

producing, and selling these goods or services during a particular period.

Profit is the difference between the price a seller receives for goods or

services and the total cost of all resources consumed in developing,

producing, and selling these goods or services during a particular period.

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Favorite Cookie CompanyProfit Earnedfor January

Resources created from selling cookies $11,400Resources consumed:

Cost of merchandise sold $7,600Wages 1,000Rent 600Supplies 300Utilities 200 Total cost of resources consumed 9,700

Profit earned $ 1,700

Exhibit 6Exhibit 6Exhibit 6Exhibit 6

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Eduardo has started a small business making sundials. The following transactions occurred for the business during a recent period. How much profit did the company earn for the period?


Sales to customers $1,050Rent for the period 425Supplies used during the period 250Wages for the period 175


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Resources created from selling sundials $1,050Resources consumed:

Rent $425Supplies 250Wages 175 Total cost of resources consumed 850

Profit earned $ 200

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44Explain how accounting helps investors and other decision makers understand businesses.


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Owners invest in a business to receive a return on their investments from

profits earned by that business.

Owners invest in a business to receive a return on their investments from

profits earned by that business.

ROI = Profit

Amount Invested

Investment by OwnersInvestment by OwnersInvestment by OwnersInvestment by Owners

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ROI = Profit

Amount Invested

Return on investment (ROI) is the amount of

profit earned by a business that could be

paid to owners.

Return on investment (ROI) is the amount of

profit earned by a business that could be

paid to owners.


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If Maria and Stan invested $10,000 to start Favorite Cookie Company and

earned a $1,700 profit, what would be the return on investment?

If Maria and Stan invested $10,000 to start Favorite Cookie Company and

earned a $1,700 profit, what would be the return on investment?

ROI = Profit

Amount Invested

$1,700 $10,000

17% =


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On January 1, 2007, Alicia invested $4,000 in a savings account. At the end of January, the account balance had

increased to $4,020. The balance at the end of February was $4,040.10. The balance at the end of March was $4,060.30.

The increases occurred because of interest earned on the account. What was Alicia’s return on investment, in dollars

and cents, for each of the three months?



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February ($4,040.10 – $4,020) 20.10March ($4,060.30 – $4,040.10) 20.20

January ($4,020 – $4,000) $20.00

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What was the total return for the three months taken together?


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January ($4,020 – $4,000) $20.00February ($4,040.10 – $4,020) 20.10March ($4,060.30 – $4,040.10) 20.20 Total return for three months $60.30

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An effective business is one that is successful in providing goods and services demanded by customers.

An effective business is one that is successful in providing goods and services demanded by customers.

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An efficient business is one that keeps the cost of

resources consumed in providing goods and

services low relative to the selling prices of these goods and services.

An efficient business is one that keeps the cost of

resources consumed in providing goods and

services low relative to the selling prices of these goods and services.

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55Identify business ownership structures and their advantages and disadvantages.


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Business OwnershipBusiness OwnershipBusiness OwnershipBusiness Ownership

A corporation is a legal entity with—1. the right to enter into contracts,2. the right to own, buy, and sell

property,3. and the right to sell stock.

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Proprietorships and partnerships are business organizations that do not have legal identities distinct from their owners. How do they differ?


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Proprietorships have only one owner.

Proprietorships have only one owner.


Partnerships have more than one owner.

Partnerships have more than one owner.

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Total Companies

Data source: U.S. Census Bureau Web site http://www.census.gov

6%

73%

21%

Proprietorship

Corporation

Partnership


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Total Sales

Data source: U.S. Census Bureau Web site http://www.census.gov

4%

5%

91%

ProprietorshipCorporationPartnership


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Management of CorporationsManagement of CorporationsManagement of CorporationsManagement of Corporations

Board of Directors, Chief Executive

Officer, President, Other Top Management

Board of Directors, Chief Executive

Officer, President, Other Top Management

The The CompanyCompany



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ResearchResearchResearchResearch

DesignDesignDesignDesign

FinancingFinancingFinancingFinancing

Legal Legal ServicesServices

Legal Legal ServicesServices

InformationInformationSystemsSystems

InformationInformationSystemsSystems

AccountingAccountingAccountingAccounting

HumanHumanResourcesResources

HumanHumanResourcesResources

PurchasingPurchasingPurchasingPurchasing



Support Functions Exhibit 7Exhibit 7Exhibit 7Exhibit 7

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Primary Functions

ProductionProductionProductionProduction

DistributionDistributionDistributionDistribution MarketingMarketingMarketingMarketing

ServicingServicingServicingServicing




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Advantages of CorporationsAdvantages of CorporationsAdvantages of CorporationsAdvantages of Corporations Corporations have continuous lives

apart from those of their owners.


Shareholders normally are not liable personally for the debts of a corporation (limited liability).

Shareholders of most corporations do not manage the company. Instead, professional managers are hired to run the company.

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Advantages of CorporationsAdvantages of CorporationsAdvantages of CorporationsAdvantages of Corporations Shareholders cannot enter into contracts or

agreements that are binding on a corporation unless they are managers or directors.

By selling shares to many investors, a corporation can obtain a large amount of financial resources.

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A partnership can be organized as a limited liability partnership (LLP). The

LLP restricts the personal liability of each partner for obligations created by

the company.

A partnership can be organized as a limited liability partnership (LLP). The

LLP restricts the personal liability of each partner for obligations created by

the company.

LEARNING NOTELEARNING NOTELEARNING NOTELEARNING NOTE

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Disadvantages of CorporationsDisadvantages of CorporationsDisadvantages of CorporationsDisadvantages of Corporations

Most corporations must pay taxes on their income.


Corporations are regulated by various state and federal government agencies.

Compliance with disclosure regulations is costly and some of the required disclosures may be helpful to competitors.

Owners of corporations usually do not have access to information about the day-to-day activities of their company.

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Disadvantages of CorporationsDisadvantages of CorporationsDisadvantages of CorporationsDisadvantages of Corporations

The size of larger corporations make them difficult to manage.

With the exception of Subchapter S corporations, the profits of corporations are taxed separately from taxes paid by the owners of the corporation.

Managers’ personal interests sometimes conflicts with the interest of stockholders. This problem produces a condition known as moral hazard.

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A creditor is someone who loans financial

resources to an organization.

A creditor is someone who loans financial

resources to an organization.

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Sources of Financing for Sources of Financing for Selected CorporationsSelected Corporations

Sources of Financing for Sources of Financing for Selected CorporationsSelected Corporations

0%10%20%30%40%50%60%70%80%90%

100%

P & G Wal-Mart

Coca-Cola

Micro-Soft

CreditorsOwners


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Obtaining Financial ResourcesObtaining Financial ResourcesObtaining Financial ResourcesObtaining Financial Resources

Proprietorship

or

Partnership

or

Corporation

Owners

+

FinancialInstitutions

Individuals

Creditors

Financial Resources


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Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN).

Some items have more than one answer.

Press “Enter” or click the left mouse button for answer.

a. Distinct legal entity separate from its owners.b. More than one owner.c. Ownership by stockholders.d. Controlled by a board of directors.e. Legal identity changes when a company is sold.

CC, PN

CC

PR, PN


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f. Limited liability.g. Mutual agency.h. Access to large amounts of cash.i. Direct taxation of profits.j. Moral hazard usually not a major problem.

CPN

CC

PR, PN

Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN).

Some items have more than one answer.

Press “Enter” or click the left mouse button for answer.

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66Identify uses of accounting information for making decisions about corporations.


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Contracts are legal agreements for the

exchange of resources and services.

Contracts are legal agreements for the

exchange of resources and services.

Contract terms establish the rights and

responsibilities of the contracting parties.

Contract terms establish the rights and

responsibilities of the contracting parties.

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Examples of Exchanges Examples of Exchanges Requiring InformationRequiring Information


The Organization

Obtain Money

Acquire Resources

Produce and Sell Goods and Services

Obtain Money

Acquire Resources


MoneyMoney

MoneyMoney

MoneyMoney

ProductsProducts

MoneyMoney

InvestorsInvestors

Managers & Employees


SuppliersSuppliers

CustomersCustomers

Government Agencies

Government Agencies


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The Organization

Obtain Money

Acquire Resources


Obtain Money

Acquire Resources


InvestorsInvestors



SuppliersSuppliers

CustomersCustomers

Government Agencies

Government Agencies

MoneyMoney

ServicesServices

MaterialsMaterials

MoneyMoney

ServicesServices


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Investors and CreditorsInvestors and CreditorsInvestors and CreditorsInvestors and Creditors

Accounting information helps investors evaluate the risk and return

they can expect from their

investments.

Accounting information helps investors evaluate the risk and return

they can expect from their

investments.

It also helps them determine whether

managers of companies they

invest in are meeting the terms of

their contracts.

It also helps them determine whether

managers of companies they

invest in are meeting the terms of

their contracts.

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ManagersManagersManagersManagers

Accounting information is useful

for identifying the types and locations of an organization’s

resources.

Accounting information is useful

for identifying the types and locations of an organization’s

resources.

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EmployeesEmployeesEmployeesEmployees

Accounting information

helps managers assess

employee performance

Accounting information

helps managers assess

employee performance

Accounting information helps

employees assess the risk and return of their employment

contracts.


employees assess the risk and return of their employment

contracts.

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SuppliersSuppliersSuppliersSuppliers


companies evaluate the abilities of their suppliers to meet

their resource needs.


companies evaluate the abilities of their suppliers to meet

their resource needs.

Suppliers often use accounting information about their customers to

evaluate the risk of a buyer not being able to

pay for goods and services acquired.

Suppliers often use accounting information about their customers to

evaluate the risk of a buyer not being able to

pay for goods and services acquired.

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CustomersCustomersCustomersCustomers

Accounting information is used to

assess the risks of buying from specific

companies and selling to specific customers.

Accounting information is used to

assess the risks of buying from specific

companies and selling to specific customers.

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Government agencies collect

information about organizations as a basis for economic

forecasts and planning.

Government agencies collect

information about organizations as a basis for economic

forecasts and planning.

Government AgenciesGovernment AgenciesGovernment AgenciesGovernment Agencies

Government agencies use accounting

information to make taxation and

regulatory decisions.

Government agencies use accounting

information to make taxation and

regulatory decisions.

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77Explain the purpose and importance of accounting regulations.


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Financial accounting is the process of preparing, reporting,

and interpreting accounting information that is provided to

external decision makers.

Financial accounting is the process of preparing, reporting,

and interpreting accounting information that is provided to

external decision makers.

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Generally accepted accounting procedures (GAAP) are standards

developed by professional accounting organizations to identify appropriate accounting and reporting procedures.

Generally accepted accounting procedures (GAAP) are standards

developed by professional accounting organizations to identify appropriate accounting and reporting procedures.

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An audit is a detailed examination of an

organization’s financial reports.

An audit is a detailed examination of an

organization’s financial reports.

The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP

are certified public accountants.

The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP

are certified public accountants.

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The Securities and Exchange Commission

is a governmental agency that examines corporate

financial reports to verify their conformance with

GAAP and SEC requirements.

The Securities and Exchange Commission

is a governmental agency that examines corporate

financial reports to verify their conformance with

GAAP and SEC requirements.

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88Explain why ethics are important for business and accounting.


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Ethical behavior is particularly important for accounting because the reliability of accounting

information depends on the honesty of those who

prepare, report, and audit this information.

Ethical behavior is particularly important for accounting because the reliability of accounting

information depends on the honesty of those who

prepare, report, and audit this information.

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THE ENDTHE END

CCHAPTERHAPTER F1 F1

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