Chapter 1 Chapter 1 Business: What’s It All About?Business: What’s It All About?

Part 1

Chapter 1:Business:

What’s it allabout?

Chapter 2: Qualitiesof FinancialInformation

Chapter 3: Timingis Everything:Accruals and

Deferrals

Chapters 4:Keeping theBooks: The

Mechanics ofan Accounting

System

Chapter 5:BusinessRisks andControls

The Business Cycle:Basic Business Processes

Chapter 8:Sales/Collection:Cash, Accounts

Receivable

Chapters 9 & 10:Obtain Financing:Debt and Equity

Chapter 6:Acquisition/Payment:

PPEReturn

toOwners Chapter 7:

Acquisition/Payment:

Inventory andHuman Resources

Chapter 11:Statement ofCash Flows

The cycle startshere…

Fundamental Financial Accounting:A Business Process Approach

…but we’ll start thecycle here and finishup with financing.

Chapter 1:Business:

What’s it allabout?

Chapter 2: Qualitiesof FinancialInformation

Chapter 3: Timingis Everything:Accruals and

Deferrals

Chapters 4:Keeping theBooks: The

Mechanics ofan Accounting

System

Chapter 5:BusinessRisks andControls

The Business Cycle:Basic Business Processes

Chapter 8:Sales/Collection:Cash, Accounts

Receivable

Chapters 9 & 10:Obtain Financing:Debt and Equity

Chapter 6:Acquisition/Payment:

PPEReturn

toOwners Chapter 7:

Acquisition/Payment:

Inventory andHuman ResourcesChapter 11:

Statement ofCash Flows

The cycle startshere…

Fundamental Financial Accounting:A Business Process Approach

…but we’ll start thecycle here and finishup with financing.

Purpose of a BusinessPurpose of a Business

ADD VALUE Make a PROFIT

A Simple Model of a BusinessA Simple Model of a Business

“The Firm”

INPUTS OUTPUTS

Acquisition/Payment Cycle Sales/Collection Cycle

Value-added

conversion

A Simple Model of a BusinessA Simple Model of a Business

“The Firm”

INPUTS OUTPUTS

Capital (financing)Property, Plant, EquipmentRaw MaterialsLaborInventoryGoods & Services

Acquisition/Payment Cycle Sales/Collection Cycle

Value-added

conversion

A Simple Model of a BusinessA Simple Model of a Business

“The Firm”

INPUTS OUTPUTS

Capital (financing)Property, Plant, EquipmentRaw Materials Delivery of product orLabor serviceInventoryGoods & Services

Acquisition/Payment Cycle Sales/Collection Cycle

Value-added

conversion

What are business processes ?What are business processes ?

A series of activities that a company performs to achieve its goals.

What are business processes?What are business processes?

A series of activities that a company performs to achieve its goals.

ACQUISITION / PAYMENT: acquire, maintain, and pay for the resources needed by the organization.

What are business processes? What are business processes?

A series of activities that a company performs to achieve its goals.

CONVERSION: covert the resources acquired into goods and services.

What are business processes? What are business processes?

A series of activities that a company performs to achieve its goals.

SALES / COLLECTIONS: sell and deliver goods and services to customers and to collect payment.

Types of BusinessesTypes of Businesses

Service company-- provides a service for customers Special case: financial services--

Sales Company-- Merchandising--buys goods and resells

them to other businesses (wholesale) or to final customers (retail)

Types of BusinessesTypes of Businesses

Service company-- provides a service for customers Special case: financial services--

Sales Company-- Merchandising--buys goods and resells

them to other businesses (wholesale) or to final customers (retail)

Manufacturing--makes a product and sells it

Examples:Examples: Service

accountants, attorneys, physicians Financial Service

Citicorp, Merrill Lynch, American Express

Merchandising Wal-Mart, Safeway, The Gap

Manufacturing General Motors, 3M, Reynolds Metals

[Obviously, some businesses provide more than one of the functions listed above]

Ownership Structure of BusinessesOwnership Structure of Businesses

Sole Proprietorship--a single owner business

Partnership--a multiple-owner business Corporation--a business whose

ownership is divided into "shares" and may be owned by a large number of people

CorporationsCorporations

A corporation is a popular form of business because . . .

CorporationsCorporations

A corporation is a popular form of business because . . . It is simple for individuals to purchase

small amounts of stock.

CorporationsCorporations

A corporation is a popular form of business because . . . It is simple for individuals to purchase

small amounts of stock. It allows for an easy transfer of

ownership through established markets, like the New York Stock Exchange.

CorporationsCorporations

A corporation is a popular form of business because . . . It is simple for individuals to purchase small

amounts of stock. It allows for an easy transfer of ownership

through established markets, like the New York Stock Exchange.

It provides stockholders with limited liability.

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . .

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . . Own assets.

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities.

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities. Sue and be sued.

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities. Sue and be sued. Enter into contracts independent of the

stockholder owners.

CorporationsCorporations

Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities. Sue and be sued. Enter into contracts independent of the

stockholder owners.

Many Americans own stock through a mutual fund or pension program.

Issues in deciding between sole proprietorship, partnership, or corporation

Personal liability Taxation Transfer of ownership Ability to raise capital Government regulation

Characteristics of Different Forms Characteristics of Different Forms of Business Organizationof Business Organization

Ownership of a CorporationOwnership of a Corporation

Owners of common stock generally receive the following rights:

Ownership of a CorporationOwnership of a Corporation

Owners of common stock generally receive the following rights: Voting (in person or by proxy).

Ownership of a CorporationOwnership of a Corporation

Owners of common stock generally receive the following rights: Voting (in person or by proxy). Distributions of profits.

Ownership of a CorporationOwnership of a Corporation

Owners of common stock generally receive the following rights: Voting (in person or by proxy). Distributions of profits. Distributions of assets in a liquidation.

Ownership of a CorporationOwnership of a Corporation

Owners of common stock generally receive the following rights: Voting (in person or by proxy). Distributions of profits. Distributions of assets in a liquidation. Offers to purchase shares of a new stock

issue (pro rata basis).

Creating a CorporationCreating a Corporation

State laws govern the creation of corporations.

An application for a charter (or articles of incorporation) must include the corporation’s name and purpose, kinds and amounts of capital stock authorized, and other detailed information.

Creating a CorporationCreating a Corporation

Once the state issues a charter, the stockholders elect a board of directors.

What do all businesses have in What do all businesses have in common?common?

No matter what the ownership structure of a business, they all have at least two main business processes:

What do all businesses have in What do all businesses have in common?common?

No matter what the ownership structure of a business, they all have at least two main business processes:

Acquisition/Payment Sales/Collection

Acquisition/payment processAcquisition/payment processActivityActivity Possible Documents Possible Documents

Identify need for goods/ services

Purchase requisition

Acquisition/payment processAcquisition/payment processActivityActivity Possible Documents Possible Documents

Identify need for goods/ services

Identify vendor

Purchase requisition

Purchase orderOrder goods/ services

Acquisition/payment processAcquisition/payment processActivityActivity Possible Documents Possible Documents

Identify need for goods/ services

Identify vendor

Order goods/ services

Receive and inspect goods

Purchase requisition

Purchase order

Receiving report

Acquisition/payment processAcquisition/payment processActivityActivity Possible Documents Possible Documents

Identify need for goods/ services

Identify vendor

Order goods/ services

Receive and inspect goods

Pay for goods or services

Purchase requisition

Purchase order

Receiving report

Check requisition Check

Sales/collection processSales/collection process

Customer places an order (Customer order)

Sales/collection processSales/collection process

Customer places an order (Customer order)

Customer’s credit is approved

Sales/collection processSales/collection process

Customer places an order (Customer order)

Customer’s credit is approved Warehouse selects goods for shipment

(Picking slip)

Sales/collection processSales/collection process

Customer places an order (Customer order)

Customer’s credit is approved Warehouse selects goods for shipment

(Picking slip) Goods are shipped (Packing slip)

(Shipping notice)

Sales/collection processSales/collection process

Customer places an order (Customer order)

Customer’s credit is approved Warehouse selects goods for shipment

(Picking slip) Goods are shipped (Packing slip)

(Shipping notice) Customer is billed for goods (Invoice)

Sales/collection processSales/collection process

Customer places an order(Customer order)

Customer’s credit is approved Warehouse selects goods for shipment

(Picking slip) Goods are shipped (Packing slip) (Shipping

notice) Customer is billed for goods (Invoice) Payment for goods is received(Check)

Business TransactionsBusiness Transactions

Business transactions are exchanges. The two transactions that make up an

“exchange” are the GIVE part and the GET part.

The exchange occurs between the business entity and a person or business external to the entity.

The business gives something and then gets something in return.

Resources, Events, and AgentsResources, Events, and Agents

We can model an exchange with these three components: the resources are the things being exchanged

(goods or services for money) the event describes the business action (e.g. cash

disbursement, sale, etc.) the agents are the people involved in the

exchange (e.g., the customer)

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

salesperson

customer

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

salesperson

customer

Cash

collection

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

salesperson

customer

Cash

collectioncash

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

salesperson

customer

Cash

collectioncash

customer

An example: a business sells an An example: a business sells an alarm clock for a cash:alarm clock for a cash:

Resources Events Agents

Sale

clock

salesperson

customer

Cash

collectioncash

customer

cashier

Who needs accounting information?Who needs accounting information?

A) Management

Who needs accounting information?Who needs accounting information?

A) Management

B) Those with a direct financial interest Present or potential investors

Present or potential creditors

Who needs accounting information?Who needs accounting information?

C)Those with an indirect financial interest Tax Authorities Regulatory Agencies Economic Planners Labor unions, financial advisors, others.

Who needs accounting information?Who needs accounting information?

C)Those with an indirect financial interest Tax Authorities Regulatory Agencies Economic Planners Labor unions, financial advisors, others.

D) Employees

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales the company’s information system

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

the company’s information system

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

the company’s information system

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

Payments

the company’s information system

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

Payments

the company’s information system

Various views of the data:

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

Payments

the company’s information system

Various views of the data:

Financial data for external

reports

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

Payments

the company’s information system

Various views of the data:

Financial data for external

reports

Production information

Financial Accounting InformationFinancial Accounting Information

Information related to:

Sales

Purchases

Collections

Payments

the company’s information system

Various views of the data:

Financial data for external

reports

Production information

Customer and vendor information