2009 The McGraw-Hill Companies, Inc., All Rights ReservedACCOUNTINGINBUSINESSChapter1McGraw-Hill/IrwinSlide 2McGraw-Hill/IrwinSlide 2IdentifyingSelecttransactionsandeventsRecordingInput,measureandclassifyCommunicatingPrepare,analyzeandinterpretIMPORTANCEOFACCOUNTINGAccountingC1McGraw-Hill/IrwinSlide 3McGraw-Hill/IrwinSlide 3USERSOFACCOUNTINGINFORMATIONExternalUsersLendersShareholdersGovernmentsConsumerGroupsExternalAuditorsCustomersInternalUsersManagersOfficers/DirectorsInternalAuditorsSalesStaffBudgetOfficersControllersC2McGraw-Hill/IrwinSlide 4McGraw-Hill/IrwinSlide 4USERSOFACCOUNTINGINFORMATIONExternalUsersFinancialaccountingprovidesexternaluserswithfinancialstatements.InternalUsersManagerialaccountingprovidesinformationneedsforinternaldecisionmakers.C2McGraw-Hill/IrwinSlide 5McGraw-Hill/IrwinSlide 5OPPORTUNITIESINACCOUNTINGFinancialPreparationAnalysisAuditingRegulatoryConsultingPlanningCriminalinvestigationManagerialGeneralaccountingCostaccountingBudgetingInternalauditingConsultingControllerTreasurerStrategyTaxationPreparationPlanningRegulatoryInvestigationsConsultingEnforcementLegalservicesEstateplansAccounting-relatedLendersConsultantsAnalystsTradersDirectorsUnderwritersPlannersAppraisersFBIinvestigatorsMarketresearchersSystemsdesignersMergerservicesBusinessvaluationHumanservicesLitigationsupportEntrepreneursC3McGraw-Hill/IrwinSlide 6McGraw-Hill/IrwinSlide 6ACCOUNTINGJOBSBYAREAC3McGraw-Hill/IrwinSlide 7McGraw-Hill/IrwinSlide 7BeliefsthatdistinguishrightfromwrongAcceptedstandardsofgoodandbadbehaviorETHICS-AKEYCONCEPTC4McGraw-Hill/IrwinSlide 8McGraw-Hill/IrwinSlide 8IdentifyethicalconcernsAnalyzeoptionsMakeethicaldecisionUsepersonalethicstorecognizeethicalconcern.Considerallgoodandbadconsequences.Choosebestoptionafterweighingallconsequences.ETHICS-AKEYCONCEPTC4McGraw-Hill/IrwinSlide 9McGraw-Hill/IrwinSlide 9Financialaccountingpracticeisgovernedbyconceptsandrulesknownasgenerallyacceptedaccountingprinciples(GAAP).GENERALLYACCEPTEDACCOUNTINGPRINCIPLESRelevantInformationAffectsthedecisionofitsusers.ReliableInformationIstrustedbyusers.ComparableInformationIshelpfulincontrastingorganizations.C5McGraw-Hill/IrwinSlide 10McGraw-Hill/IrwinSlide 10TheSecuritiesandExchangeCommissionisthegovernmentgroupthatestablishesreportingrequirementsforcompaniesthatissuestocktothepublic.SETTINGACCOUNTINGPRINCIPLESFinancialAccountingStandardsBoardFinancialAccountingStandardsBoardistheprivategroupthatsetsbothistheprivategroupthatsetsbothbroadandspecificprinciples.broadandspecificprinciples.TheInternationalAccountingStandardsBoard(IASB)issuesInternationalFinancialReportingStandardsthatidentifypreferredaccountingpracticestocreateharmonyamongaccountingpracticesofdifferentcountries.C5McGraw-Hill/IrwinSlide 11McGraw-Hill/IrwinSlide 11PRINCIPLESANDASSUMPTIONSOFACCOUNTINGCostPrincipleAccountinginformationisbasedonactualcost.Actualcostisconsideredobjective.RevenueRecognitionPrinciple1.Recognizerevenuewhenitisearned.2.Proceedsneednotbeincash.3.Measurerevenuebycashreceivedpluscashvalueofitemsreceived.MatchingPrincipleAcompanymustrecorditsexpensesincurredtogeneratetherevenuereported.FullDisclosurePrincipleAcompanyisrequiredtoreportthedetailsbehindfinancialstatementsthatwouldimpactusersdecisions.C5McGraw-Hill/IrwinSlide 12McGraw-Hill/IrwinSlide 12PRINCIPLESANDASSUMPTIONSOFACCOUNTINGMonetaryUnitAssumptionExpresstransactionsandeventsinmonetary,ormoney,units.BusinessEntityAssumptionAbusinessisaccountedforseparatelyfromotherbusinessentities,includingitsowner.TimePeriodAssumptionPresumesthatthelifeofacompanycanbedividedintotimeperiods,suchasmonthsandyears.NowFutureGoing-ConcernAssumptionReflectsassumptionthatthebusinesswillcontinueoperatinginsteadofbeingclosedorsold.C5McGraw-Hill/IrwinSlide 13McGraw-Hill/IrwinSlide 13FORMSOFBUSINESSENTITIESSoleProprietorshipPartnershipCorporationMcGraw-Hill/IrwinSlide 14McGraw-Hill/IrwinSlide 14*ProprietorshipsandpartnershipsthataresetupasLLCsprovidelimitedliability.CHARACTERISTICSOFBUSINESSES*McGraw-Hill/IrwinSlide 15McGraw-Hill/IrwinSlide 15Ownersofacorporationarecalledshareholders(orstockholders).Shareholdersarenotpersonallyliableforcorporateacts.Whenacorporationissuesonlyoneclassofstock,wecallitcommonstock(orcapitalstock).CORPORATIONMcGraw-Hill/IrwinSlide 16McGraw-Hill/IrwinSlide 16SARBANES-OXLEY(SOX)CongresspassedtheSarbanes-OxleyActtohelpcurbfinancialabusesatcompaniesthatissuetheirstocktothepublic.Managementmustissueareportstatingthatinternalcontrolareeffective.Auditorsmustverifytheeffectivenessofinternalcontrols.CompanyAlleged Accounting AbusesEnronInflating income, hid debt, and bribed officialsWorldComUnderstated expenses to inflate income and hid debtFannie MaeInflated incomeAdelphia Communications Understated expenses to inflate income and hid debtAOL Time WarnerInflated revenues and incomeXeroxInflated incomeBristol-Myers SquibbInflated revenues and incomeNortel NetwordsUnderstated expenses to inflate incomeMcGraw-Hill/IrwinSlide 17McGraw-Hill/IrwinSlide 17TRANSACTIONANALYSISANDTHEACCOUNTINGEQUATIONAssets=Liabilities+EquityAccountingEquationA1McGraw-Hill/IrwinSlide 18McGraw-Hill/IrwinSlide 18LandEquipmentBuildingsCashVehiclesStoreSuppliesNotesReceivableAccountsReceivableResourcesownedorcontrolledbyacompanyASSETSA1McGraw-Hill/IrwinSlide 19McGraw-Hill/IrwinSlide 19TaxesPayableWagesPayableNotesPayableAccountsPayableLIABILITIESCreditorsclaimsonassetsA1McGraw-Hill/IrwinSlide 20McGraw-Hill/IrwinSlide 20EqualtoAssetsMinusLiabilities(NetAssets)EQUITYOwnersClaimsonAssetsAMcGraw-Hill/IrwinSlide 21McGraw-Hill/IrwinSlide 21LiabilitiesEquityAssets=+EXPANDEDACCOUNTINGEQUATIONRevenuesExpensesOwner CapitalOwner Withdrawals_ _+ +_ _OwnersEquityLiabilitiesEquityAssets=+A1McGraw-Hill/IrwinSlide 22McGraw-Hill/IrwinSlide 22TRANSACTIONANALYSISEQUATIONTheaccountingequationMUSTremaininbalanceaftereachtransaction.LiabilitiesEquityAssets=+A2McGraw-Hill/IrwinSlide 23McGraw-Hill/IrwinSlide 23TRANSACTIONANALYSISTheaccountsinvolvedare:(1)Cash(asset)(2)OwnerCapital(equity)ChuckTaylorinvests$30,000cashtostartaconsultingbusiness.A2McGraw-Hill/IrwinSlide 24McGraw-Hill/IrwinSlide 24TRANSACTIONANALYSISChuckTaylorinvests$30,000cashtostartaconsultingbusiness.Assets=Liabilities+EquityCashSuppliesEquipment AccountsPayableNotesPayableC.TaylorCapital(1) $30,000 $30,000$30,000 $- $- $- $- $30,000$30,000 = $30,000 A2McGraw-Hill/IrwinSlide 25McGraw-Hill/IrwinSlide 25Theaccountsinvolvedare:(1)Cash(asset)(2)Supplies(asset)TRANSACTIONANALYSISPurchasedsuppliespaying$2,500cash.A2McGraw-Hill/IrwinSlide 26McGraw-Hill/IrwinSlide 26TRANSACTIONANALYSISPurchasedsuppliespaying$2,500cash.Assets=Liabilities+EquityCashSuppliesEquipment AccountsPayableNotesPayableC.TaylorCapital(1)$30,000$30,000(2)(2,500)$2,500 $27,500$2,500 $- $- $- $30,000$30,000 = $30,000 A2McGraw-Hill/IrwinSlide 27McGraw-Hill/IrwinSlide 27Theaccountsinvolvedare:(1)Cash(asset)(2)Equipment(asset)TRANSACTIONANALYSISPurchasedequipmentfor$26,000cash.A2McGraw-Hill/IrwinSlide 28McGraw-Hill/IrwinSlide 28TRANSACTIONANALYSISPurchasedequipmentfor$26,000cash.Assets=Liabilities+EquityCashSuppliesEquipment AccountsPayableNotesPayableC.TaylorCapital(1) $30,000 $30,000(2) (2,500)$2,500 (3) (26,000)$26,000 $1,500$2,500$26,000 $- $-$30,000 $30,000=$30,000 A2McGraw-Hill/IrwinSlide 29McGraw-Hill/IrwinSlide 29Theaccountsinvolvedare:(1)Supplies(asset)(2)AccountsPayable(liability)TRANSACTIONANALYSISPurchasedSuppliesof$7,100andonaccount.A2McGraw-Hill/IrwinSlide 30McGraw-Hill/IrwinSlide 30TRANSACTIONANALYSISPurchasedSuppliesof$7,100andonaccount.Assets=Liabilities+EquityCashSuppliesEquipment AccountsPayableNotesPayable C.TaylorCapital(1) $30,000 $30,000(2) (2,500) $2,500 (3) (26,000) $26,000 (4) 7,100 $7,100 $1,500 $9,600 $26,000 $7,100 $-$30,000$37,100 = $37,100 A2McGraw-Hill/IrwinSlide 31McGraw-Hill/IrwinSlide 31Theaccountsinvolvedare:(1)Cash(asset)(2)Revenues(equity)TRANSACTIONANALYSISProvidedconsultingservicesreceiving$4,200cash.A2McGraw-Hill/IrwinSlide 32McGraw-Hill/IrwinSlide 32TRANSACTIONANALYSISProvidedconsultingservicesreceiving$4,200cash.Assets=Liabilities+EquityCashSuppliesEquipmentAccountsPayableNotesPayableC.TaylorCapital Revenue(1) $30,000 $30,000(2) (2,500)$2,500 (3) (26,000)$26,000 (4) 7,100 $7,100(5) 4,200 $4,200$5,700$9,600$26,000 $7,100$-$30,000$4,200 $41,300= $41,300 A2McGraw-Hill/IrwinSlide 33McGraw-Hill/IrwinSlide 33FINANCIALSTATEMENTSLetspreparetheFinancialStatementsreflectingthetransactionswehaverecorded.1.IncomeStatement2.StatementofOwnersEquity3.BalanceSheet4.StatementofCashFlowsP1McGraw-Hill/IrwinSlide 34McGraw-Hill/IrwinSlide 34NetincomeisthedifferencebetweenRevenuesandExpenses.Theincomestatementdescribesacompanysrevenuesandexpensesalongwiththeresultingnetincomeorlossoveraperiodoftimeduetoearningsactivities.INCOMESTATEMENTP1McGraw-Hill/IrwinSlide 35McGraw-Hill/IrwinSlide 35Thenetincomeof$4,400increasesOwnersEquityby$4,400. STATEMENTOFOWNERSEQUITYFastForwardStatementofOwnersEquityForMonthEndedDecember31,2009C,Taylor,CapitalDecember1,2009$-Plus:Investmentbyower$30,000 Netincome4,400 34,400Less:Withdrawalsbyowner200C.Taylor,Capital,December31,2009$34,200P1McGraw-Hill/IrwinSlide 36McGraw-Hill/IrwinSlide 36TheBalanceSheetdescribesacompanysfinancialpositionatapointintime.BALANCESHEETP1McGraw-Hill/IrwinSlide 37McGraw-Hill/IrwinSlide 37STATEMENTOFCASHFLOWSP1McGraw-Hill/IrwinSlide 38McGraw-Hill/IrwinSlide 381A-RETURNANDRISKANALYSISReturnonassets(ROA)isstatedinratioformasincomedividedbyassetsinvested.Riskistheuncertaintyaboutthereturnwewillearn.5.10%5.80%6.90%7.80%8.00%7.00%6.00%5.00%4.00%3.00%2.00%1.00%0.00%U.S.TreasuryLow-riskcorporateMedium-riskcorporateHigh-riskcorporateReturnonAssets30YearBondsA3A4McGraw-Hill/IrwinSlide 39McGraw-Hill/IrwinSlide 391B-BUSINESSACTIVITIESANDTHEACCOUNTINGEQUATIONTherearethreemajortypesofactivitiesinanyorganization:1.1.FinancingActivitiesFinancingActivitiesProvidethemeansorganizationsusetopayforresourcessuchasland,buildings,andequipmenttocarryoutplans.2.2.InvestingActivitiesInvestingActivities-Aretheacquiringanddisposingofresources(assets)thatanorganizationusestoacquireandsellitsproductsorservices.3.3.OperatingActivitiesOperatingActivitiesInvolveusingresourcestoresearch,develop,andpurchase,produce,distribute,andmarketproductsandservices.C6McGraw-Hill/IrwinSlide 40McGraw-Hill/IrwinSlide 40ENDOFCHAPTER1