CHAPTER 1The Financial Statements1-1 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING - THE BASIS OF DECISION MAKING Accounting is the “language of business” Accounting is the information system that Measures business activities Processes that information into reports Communicates the results to decision makers2 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenTHE ACCOUNTING SYSTEM: THE FLOW OF INFORMATION1. People make decisions2. Business transactions occur3. Businesses prepare reports to show theresults of their operations3 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING VS. BOOKKEEPING Bookkeeping is the procedural element of accounting that processes the accounting data4 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & Horngren Individuals Businesses Investors and Creditors Government Regulatory Agencies Taxing Authorities Nonprofit OrganizationsDECISION MAKERS WHO USE ACCOUNTING INFORMATION5 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & Horngren Financial accounting provides information to managers and people outside the firm Financial accounting information must meet certain standards of relevance and reliability Management accounting generates confidential information for internal decision makers, e.g., Top executives Department headsFINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING6 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenETHICAL CONSIDERATIONS Ethical standards in accounting are designed to produce accurate information for decision making The result of ethical behavior by accountants is information that people can rely on for decision making7 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenTYPES OF BUSINESS ORGANIZATIONS Proprietorships Have a single owner who is generally the manager Are business entities, but not legal entities Have debt for which the proprietor is personally liable8 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenTYPES OF BUSINESS ORGANIZATIONS Partnerships Join two or more persons together as co- owners Are business entities, but not legal entities Have debt for which each partner is personally liable9 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenTYPES OF BUSINESS ORGANIZATIONS Corporations Are owned by stockholders or shareholders Are business entities and legal entities Are liable for all debts Stockholders have no personal obligation for corporation debts10 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING PRINCIPLES AND CONCEPTS Generally accepted accounting principles (GAAP) are The rules that govern how accountants operate Based upon a conceptual framework written by the Financial Accounting Standards Board (FASB)11 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING PRINCIPLES AND CONCEPTS The FASB works with the SEC (Securities and Exchange Commission) and the AICPA (American Institute of Certified Public Accountants)12 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenKEY ACCOUNTING ORGANIZATIONSPrivate Sector The FASB determines generally accepted accounting principlesPublic Sector Law creates the SEC to regulate the stock and bond market in the U.S.GAAP governs accounting informationPrivate Sector Accountants apply GAAP through the AICPA13 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING PRINCIPLES AND CONCEPTS The entity concept States that an organization is an economic entity that keeps its affairs separate from those of the owner(s) The reliability (objective) principle States that accounting records and statements are based on the most reliable data available and documented by objective evidence14 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING PRINCIPLES AND CONCEPTS The cost principle States that acquired assets and services should be recorded at their actual (historical) cost and should maintain that historical cost for as long as they are owned The going-concern concept States that the entity will remain in operation for the foreseeable future15 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & HorngrenACCOUNTING PRINCIPLES AND CONCEPTS The stable-monetary-unit concept States that each dollar has the same purchasing power as any other dollar at any other time16 2001 Prentice Hall Business Publishing Financial Accounti