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ACCOUNTING ACCOUNTING FUNDAMENTALS FOR FUNDAMENTALS FOR

MANAGERSMANAGERS

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2 of 57Visit UMT online at www.umtweb.eduChapter 1, ACCT125

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3 of 57Visit UMT online at www.umtweb.edu© South-Western 2004Survey of Accounting, 2/e Chapter 1, ACCT125

Chapter 1Chapter 1

The Role of Accounting in The Role of Accounting in BusinessBusiness



Learning ObjectivesLearning Objectives

After studying this chapter, you should be able to:

1. Describe the types and forms of businesses, business strategies, value chains, and stakeholders.

2. Describe the three business activities of financing, investing, and operating.

3. Define accounting and explain its role in business.4. Describe and illustrate the basic financial statements and

how they interrelate.5. Describe eight basic accounting concepts underlying

financial reporting.6. Describe and illustrate the use of horizontal analysis to

analyze and evaluate a company’s performance.



1Describe the types and forms of businesses, business strategies, value chains, and stakeholders.

Learning ObjectivesLearning Objectives



ProductProduct ProductProduct

General Motors Automobiles, trucks, vansGeneral Mills Breakfast cerealsBoeing Jet aircraftNike Athletic shoesCoca-Cola BeveragesSony Stereos, televisions, radios

General Motors Automobiles, trucks, vansGeneral Mills Breakfast cerealsBoeing Jet aircraftNike Athletic shoesCoca-Cola BeveragesSony Stereos, televisions, radios

Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business

Types of BusinessesTypes of Businesses



Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business


Wal-Mart General merchandiseToys”R”Us ToysBarnes & Noble BooksBest Buy Consumer electronicsAmazon. Com Books





Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Service BusinessService BusinessService BusinessService Business




There are three forms of business

organizations

There are three forms of business

organizations

Proprietorship Partnership Corporation



A proprietorship is owned by one

individual.

A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

Doug’s



A partnership is owned two or

more individuals.

A partnership is owned two or

more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage• Unlimited liability.

Doug and Max’s



A corporation is organized under state or federal statutes as a separate legal entity.

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain

large amounts of resources issuing stocks.

Disadvantage• Double taxation.

D & M Inc.



70%

10%

20%

ProprietorshipPartnershipCorporation

Total Companies

Business Ownership in AmericaBusiness Ownership in America



A business strategy is an integrated set of plans and actions designed to enable

the business to gain an advantage over its competitors, and to maximize profits.

Business StrategyBusiness Strategy



Under a differentiation strategy, a business

designs and produces a product or service that

possess unique attributes or

characteristics for which customers are

willing to pay a premium price.

Differentiation StrategyDifferentiation Strategy



A business stakeholder is a person or entity that has an interest in the economic

performance and well-being of a business.

A business stakeholder is a person or entity that has an interest in the economic

performance and well-being of a business.

Business StakeholdersBusiness Stakeholders



STAKEHOLDERS

Internal:Stockholders ManagersEmployees

External:SuppliersCustomersStockholders




Business Stakeholders

Interest in the Business Examples

Capital market Providers of major Banks, owners, stakeholder financing for the stockholders

business

Product or service Buyers of products Customers and market stakeholders or services and vendors suppliers

to the business

Government Collectors of taxes and Federal, state, and stakeholder fees from the business city governments

and its employeesInternal stakeholders Individuals employed Employees and

by the business managers




2Describe the three business activities of financing, investing, and operating.

Learning ObjectiveLearning Objective



Financing activities involve obtaining funds to begin and operate a business.

Financing ActivitiesFinancing Activities



Businesses seek financing by:borrowing

issuing shares of ownership




A liability is a legal obligation to repay the amount borrowed according to the

terms of the borrowing agreement.




Samples of Liabilities

• Accounts payable: When a business buys a service or product on service.

• Bonds payable: When a business borrows money by issuing bonds.

• Interest payable: Any interest that is due on a note or a bond.

• Note payable: When a business issues commercial paper or borrows on a line of credit.




A business may also finance its operations by issuing shares of stock. The basic type of stock

is called common stock.

A business may also finance its operations by issuing shares of stock. The basic type of stock

is called common stock.




Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

Investing ActivitiesInvesting Activities



Assets are resources that the business

owns or are otherwise under its legal control and

available for use in the future.

Assets are resources that the business

owns or are otherwise under its legal control and

available for use in the future.

What are assets?What are assets?




When the business sells merchandise or services to a

customer, the right to collect is an account receivable.

When the business sells merchandise or services to a

customer, the right to collect is an account receivable.




Revenue is the increase in assets

from selling products or services. Revenue

is often identified according to its

source, such as Rent Revenue.

Revenue is the increase in assets

from selling products or services. Revenue

is often identified according to its

source, such as Rent Revenue.

What is revenue?What is revenue?

Operating ActivitiesOperating Activities



An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary

operating activities of an organization.

An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary

operating activities of an organization.

What is an expense?

What is an expense?




Revenues

- Expenses

= Net Income

Revenues

- Expenses

= Net Income= Net Loss




Define accounting and its role in business.3




Accounting is an information system that provides reports to

stakeholders about the economic activities and condition of a business.

Accounting is an information system that provides reports to

stakeholders about the economic activities and condition of a business.

What is accounting?What is accounting?



1. To report the financial condition of a business at a point in time.

1. To report the financial condition of a business at a point in time.

2. To report changes in the financial condition of a business over a period of time.

2. To report changes in the financial condition of a business over a period of time.

Major objectives of financial Major objectives of financial accountingaccounting



Describe and illustrate the basic financial statements and how they interrelate.

4Learning ObjectiveLearning Objective



An income statement is a summary of the revenue and the expenses for a specific period of time.

An income statement is a summary of the revenue and the expenses for a specific period of time.

Objective:Objective:Objective:Objective:Reports Reports

change in change in financial financial conditioncondition

Reports Reports change in change in financial financial conditioncondition

Income StatementIncome Statement



Hershey Foods CorporationIncome Statement

For the Year Ended December 31, 2001(in thousands)

Revenues:Sales $4,557,241

Expenses:Cost of sales $2,665,566Selling and administrative 1,269,964Other expenses 209,077Interest 69,093Income taxes 136,385 4,350,085

Net income $ 207,156

Note that the time period for the

statement is in the heading.

Note that the time period for the

statement is in the heading.

Income StatementIncome Statement



The retained earnings statement reports changes in

financial condition due to changes in retained earnings.

The retained earnings statement reports changes in

financial condition due to changes in retained earnings.




Retained Earnings StatementRetained Earnings Statement



Hershey Foods CorporationRetained Earnings StatementFor the Year Ended December 31, 2001

(in thousands)

Retained earnings, January 1, 2001 $2,702,927Add net income $207,156Less dividends 154,750Increase in retained earnings 52,406Retained earnings, December 31, 2001 $2,755,333From the

income statement

From the income

statement

Again, note the time period

Again, note the time period

Retained Earnings StatementRetained Earnings Statement



The balance sheet reports the financial condition as

of a point in time.

The balance sheet reports the financial condition as

of a point in time.

Objective:Objective:Objective:Objective:Reports Reports financial financial conditioncondition

Reports Reports financial financial conditioncondition

Balance SheetBalance Sheet



AssetsAssets = (Claims) Rights to the Assets




AssetsAssets = LiabilitiesLiabilitiesStock-

holders’ Equity

Stock-holders’ Equity

+

The rights of creditors

The rights of the stockholders

The The Accounting Accounting EquationEquation

The The Accounting Accounting EquationEquation




Hershey Foods CorporationBalance SheetDecember 31, 2001

(in thousands)

AssetsCash $ 134,147Accounts receivable 361,726Inventories 512,134Prepaid expenses 62,595Property, plant, and equipment 1,534,901Intangibles 429,128Other assets 212,799Total assets $3,247,430

ContinuedContinuedContinuedContinued

Note that the date is a specific point

in time

Note that the date is a specific point

in time




LiabilitiesAccounts payable $ 133,049Accrued liabilities 462,901Notes and other debt 1,245,939Income taxes 258,337

Total liabilities $2,100,226

Stockholders’ EquityCapital stock $ 183,213Retained earnings 2,755,333Repurchased stock and other equity items (1,791,342)

Total stockholders’ equity $1,147,204Total liabilities and stockholders’ equity $3,247,430

Matches total assetsMatches total assetsMatches total assetsMatches total assets



The statement of cash flows reports the changes in financial condition due

to the changes in cash during a period.

The statement of cash flows reports the changes in financial condition due

to the changes in cash during a period.




Statement of Cash FlowsStatement of Cash Flows



Three categories on the statement of cash flow are:

Three categories on the statement of cash flow are:1. Operating activities

2. Investing activities

3. Financing activities

Statement of Cash FlowsStatement of Cash Flows


Hershey Foods CorporationStatement of Cash Flows

For the Year Ended December 31, 2001(in thousands)

Net cash flows from operating activities $ 706,405Cash flows from investing activities:

Investments in property, plant, and equipment $(187,029)Proceeds from sale of property, plant, and equipment 63,042

Net cash flows used in investing activities $(123,987)Cash flows from financing activities:

Cash receipts from financing activities, including debt $ 30,589Dividends paid to stockholders (154,750)Repurchase of stock (40,322)Other, including repayment of debt (315,757)

Net cash flows used in financing activities $(480,240)Net increase in cash during 2001 $ 102,178Cash as of January 1, 2001 31,969Cash as of December 31, 2001 $ 134,147

Note the time periodNote the time period


Describe eight basic accounting concepts underlying financial reporting.5



The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.

The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.The cost concept

determines the amount initially entered into the accounting records for

purchases.

The cost concept determines the amount initially entered into the accounting records for

purchases.

Accounting ConceptsAccounting Concepts


A business normally expects to continue operating for an indefinite period of time. This is known as the

going concern concept.

A business normally expects to continue operating for an indefinite period of time. This is known as the

going concern concept.Under the matching concept, revenues for a period are matched

with the expenses incurred in generating the revenue.

Under the matching concept, revenues for a period are matched

with the expenses incurred in generating the revenue.The objectivity concept requires

that entries in the accounting records and the data reported on financial statements be based on

objective evidence.

The objectivity concept requires that entries in the accounting

records and the data reported on financial statements be based on

objective evidence.



The unit of measure concept requires that all economic data be

recorded in dollars.

The unit of measure concept requires that all economic data be

recorded in dollars.Financial statements should contain all relevant data a reader needs to

understand the financial condition and performance of a business. This is the adequate disclosure concept.

Financial statements should contain all relevant data a reader needs to

understand the financial condition and performance of a business. This is the adequate disclosure concept.

The accounting period concept is the process in which accounting

data are recorded and summarized in financial statements.

The accounting period concept is the process in which accounting

data are recorded and summarized in financial statements.



DEC. 31

2003

Balance Sheet Dec. 31, 2003

Income statement for the

year ended December 31,

2003

Next slide

Financial History of a BusinessFinancial History of a Business


DEC. 31

2004




2004

Next slide



DEC. 31

2005




2005



Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance.6




For the Year Ended December 31, 2001 and 2000(in thousands)

Sales $4,557,241 $4,220,976 $336,265Cost of sales 2,665,566 2,471,151 194,415Gross profit $1,891,675 $1,749,825 $141,850Selling and admin. expenses 1,269,964 1,127,175 142,789Operating income before taxes $ 621,711 $ 622,650 $ (939)

2001 2000 Amount Percent

$336,265$4,220,976

8.0%

Horizontal AnalysisHorizontal Analysis





2001 2000 Amount Percent

$194,415$2,471,151

8.0%7.9%






2001 2000 Amount Percent8.0%7.9%8.1%

12.7%

(0.2)%


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