Chapter 1Introduction to Accounting and BusinessFinancial and Managerial Accounting8th EditionWarren Reeve Fess

1.Describe the nature of a business.2.Describe the role of accounting in business.3.Describe the importance of business ethics and the basic principles of proper ethical conduct.4.Describe the profession of accounting.5.Summarize the development of accounting principles and relate them to practice.6.State the accounting equation and define each element of the equation.ObjectivesAfter studying this chapter, you should be able to:

7.Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.Objectives8.Describe the financial statements of a corporation and explain how they interrelate.9.Use the ratio of liabilities to stockholders equity to analyze the ability of a business to withstand poor business conditions.

Manufacturing BusinessTypes of Businesses

Merchandising BusinessTypes of Businesses

Service BusinessTypes of Businesses

There are three types of business organizationsProprietorshipPartnershipCorporation

A proprietorship is owned by one individual. AdvantagesEase in organizingLow cost of organizingDisadvantageLimited source of financial resourcesUnlimited liabilityJoes

A partnership is owned by two or more individuals. AdvantagesMore financial resources than a proprietorship.Additional management skills.DisadvantageUnlimited liability.Joe and Martys

A corporation is organized under state or federal statutes as a separate legal entity.AdvantageThe ability to obtain large amounts of resources by issuing stocks.DisadvantageDouble taxation.J & M, Inc.

Business StrategiesA business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

Business StrategiesUnder a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors.Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.

A business stakeholder is a person or entity having an interest in the economic performance of the business.Business Stakeholders

The Process of Providing Information

The Process of Providing InformationAccounting Information System

Accounting Information SystemThe Process of Providing Information

Profession of AccountingAccountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting.Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

Generally Accepted Accounting Principles (GAAP)

The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business.The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

The objectivity concept requires that the accounting records and reports be based upon objective evidence.The unit-of-measure concept requires that economic data be recorded in dollars.

The Accounting EquationAssets = Liabilities + Owners EquityThe resources owned by a business

The Accounting EquationAssets = Liabilities + Owners EquityThe rights of the creditors, which represent debts of the business

The Accounting EquationAssets = Liabilities + Owners EquityThe rights of the owners

What is a business transaction?A business transaction is an economic event or condition that directly changes an entitys financial condition or directly affects its results of operations.

On November 1, 2005, Chris Clark organized a corporation that will be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.

b. NetSolutions exchanged $20,000 for land.Capital Stock25,000 Cash + Land 25,000 Bal.AssetsOwners Equity= =b. 20,000+20,000

Accounts CapitalCash + Supplies + Land Payable StockAssetsc. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owners Liabilities + Equity= Bal.5,00020,00025,000c. + 1,350+ 1,350

d. + 7,500+ 7,500Assetsd. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Owners Liab . + Equity= Bal.5,0001,35020,0001,35025,000= Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings

e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.Bal.12,5001,35020,0001,35025,0007,500Assets Owners Liab . + Equity Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earningse. 3,6502,125 800 450 275=

f. NetSolutions paid $950 to creditors during the month.Assets Owners Liab . + Equity Accounts Capital RetainedCash + Supplies + Land Payable + Stock + EarningsBal.8,8501,35020,0001,35025,0003,850= = f. 950 950

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.Assets Owners Liab . + Equity Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings= = Bal.7,9001,35020,00040025,0003,850g. 800 800Supplies Expense

h. At the end of the month, NetSolutions pays $2,000 to stockholders.Assets Owners Liab . + Equity Accounts Capital RetainedCash + Supplies + Land Payable + Stock + Earnings= Bal.7,90055020,00040025,0003,050h. 2,0002,000= = Dividends

Capital StockEffects of Transactions on Owners Equity

Retained EarningsEffects of Transactions on Owners Equity

Accounting reports, called financial statements, provide summarized information to the users.

Financial StatementsIncome statementA summary of the revenue and expenses for a specific period of time.Retained earnings statementA summary of the earnings retained in the corporation for a specific period of time.Balance sheetA list of the assets, liabilities, and stockholders equity as of a specific date.Statement of cash flowsA summary of the cash receipts and disbursements for a specific period of time.

Fees earned$7 500 00Operating expenses:Rent expense $2 125 00Wages expense800 00Supplies expense 450 00Utilities expense 275 00Miscellaneous expenseTotal operating expenses 4 450 00 NetSolutionsIncome StatementFor the Month Ended November 30, 2005800 00Net income$3 050 00Transfer this amount to the retained earnings statement.

From the income statementTransferred to the balance sheet

Assets LiabilitiesNetSolutionsBalance SheetNovember 30, 2005Cash$ 5 900 00Accounts Payable$ 400 00Supplies550 00 Stockholders EquityLand20 000 00Capital Stock$25,000Ret. Earnings l,05026 050 00Total liabilities andTotal assets$26 450 00 stockholders equity$26 450 00From the retained earnings statementThis balance sheet presented using the account form

Cash flows from operating activities:Cash received from customers$ 7 500 00Deduct cash payments for expenses and payments to creditors4 600 00Net cash flow from operating activities2 900 00Cash flows from investing activities:Cash payment for acquisition of land(20 000 00Cash flows from financing activities:Cash received as owners investment$25 000 00Deduct cash withdrawal by owner2 000 00Net cash flow from financing activities23 000 00 Net cash flow and Nov. 30, 2005 cash bal.$ 5 900 00 NetSolutionsStatement of Cash FlowsFor the Month Ended November 30, 2005Should match Cash on the balance sheet)

Statement of Cash FlowsCash Flows from Operating ActivitiesThis section reports a summary of cash receipts and cash payments from operations.Cash Flows from Investing ActivitiesThis section reports the cash transactions for the acquisition and sale of relatively permanent assets.Cash Flows from Financing ActivitiesThis section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.