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Title: The function of education is to teach one to think intensively and to think critically... Intelligence plus character


1
  • The function of education is to teach one to
    think intensively and to think critically...
    Intelligence plus character that is the goal of
    true education.
  • Martin Luther King Jr., American civil rights
    leader (1929-1968)

2
THE PURPOSE OF ACCOUNTING
TO PROVIDE
  • FINANCIAL INFORMATION
  • ABOUT A BUSINESS
  • TO INDIVIDUALS
  • AND ORGANIZATIONS

3
Forms of Business Organization
  • Sole proprietorship
  • Partnership
  • Corporation

4
Sole Proprietorship
  • Business owned by one person
  • Simple to establish
  • Owner controlled
  • Tax advantages
  • Owner personally liable
  • Financing difficult

5
Partnership
  • Two or more owners
  • Simple to establish
  • Shared control
  • Broader skills resources
  • Tax advantages
  • Personal liability

6
Corporation
  • Separate legal entity owned by stockholders
  • Easy to transfer ownership
  • Greater capital raising potential
  • Lower legal liability
  • Unfavorable tax treatment

7
THE ACCOUNTING PROCESS
Accounting Is A System Of
  • Gathering financial information
  • About a business
  • And reporting it to users

It is accomplished in 6 steps
8
STEP ONE
ANALYZING
Looking at events that have taken place and
thinking about how they affect the business
9
STEP TWO
RECORDING
Entering financial information about events into
the accounting system
10
STEP THREE
CLASSIFYING
Sorting and grouping similar items together
11
STEP FOUR
SUMMARIZING
Bringing the various items of information
together to determine a result
12
STEP FIVE
REPORTING
Giving the results to interested parties
13
STEP SIX
INTERPRETING
Deciding the meaning and importance of the
information in various reports
14
Study Objectives of Chapter 1
  • Understand the content and purpose of each of the
    financial statements.
  • Clarify the meaning of assets, liabilities, and
    stockholders equity.
  • Learn what the basic accounting equation tells us
    about a business.
  • Describe the components that supplement the
    financial statements in an annual report.

15
Study Objectives of Chapter 1
  1. Identify the users and uses of accounting
    information.
  2. Explain the 3 principal business activities that
    affect cash.

16
Define some terms
  • Sales
  • Revenue
  • Expense
  • Asset
  • Liability
  • Owners Equity

17
Content and Purpose of Financial Statements
  • How would you answer the question, How is your
    business doing?
  • Businesses tell users how they are doing through
    four financial statements

18
Four Financial Statements
  • Income Statement
  • Retained Earnings Statement
  • Balance Sheet
  • Statement of Cash Flows

Over Time
Over Time
At some point in Time
Over Time
19
Income Statement
  • Did you make any money???
  • Summarizes revenues and expenses for period
    month, quarter, year.
  • If revenue gt expense Net Income.

20
Income Statement
Do this statement first!
21
Retained Earnings Statement
  • Shows changes in retained earnings for period
    month, quarter, year
  • Beginning balance
  • Add Net Income from income statement.
  • Deduct Dividends
  • Ending balance

22
Retained Earnings Statement
Do this statement second!
23
Balance Sheet
  • Reports assets and claims to assets.
  • Claims of creditors, liabilities.
  • Claims of owners, stockholders equity.
  • Assets Liabilities Stockholders Equity
  • Specific date one point in time!

24
Balance Sheet
From Retained Earnings Statement
25
Statement of Cash Flows
  • Provides information about cash receipts and cash
    payments
  • Summarizes for period month, quarter, year.
  • Cash effects of operating, investing, and
    financing activities.

26
Statement of Cash Flows
  • Where did the cash come from?
  • How was cash used during the period?
  • What was the change in the cash balance during
    the period?
  • A company cannot survive without cash!

27
Statement of Cash Flows..
Agrees with Balance Sheet
28
Three Business Activities that affect Cash
  • Operating
  • Investing
  • Financing

29
Operating Activities
  • Revenues are the increases in assets resulting
    from the sale of a product or service
  • Expenses are the cost of assets consumed or
    services used in generating revenue.
  • If revenue gt expense Net Income
  • If revenue lt expense Net Loss!

30
Operating Activities
  • What the business does to make money
  • Selling goods
  • Providing services
  • Manufacturing
  • Cost of Sales
  • Advertising
  • Paying employees
  • Paying utilities

31
Investing Activities
  • Investments in the companys future (Obtaining
    resources or assets to operate the business)
  • Land
  • Buildings
  • Vehicles
  • Computers
  • Furniture
  • Equipment

32
Financing Activities Raising money to finance
the business
  • Borrowing creates liabilities
  • Bank loans
  • Debt securities
  • Goods on credit or payables
  • Selling stock creates stockholders equity

33
Statement of Cash Flows
  • To be continued in chapter 13.

34
Users of Financial InformationInternal
  • Internal
  • vs.
  • External

35
Assets
  • Resources owned by the business to be used to
    generate future revenue
  • Cash
  • Accounts receivable
  • Inventories
  • Furniture and fixtures
  • Equipment
  • Supplies

36
Liabilities
  • Obligations or debts of the business
  • Notes payable
  • Accounts payable
  • Interest payable
  • Salaries payable
  • Unearned revenue

37
Stockholders Equity
  • Ownership claims on assets
  • Paid-in capital
  • Common stock
  • Retained earnings

38
Basic Accounting Equation
Assets Liabilities Stockholders Equity
39
Question 1
Which is not one of the three forms of business
organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
40
Question 2
Which is an advantage of corporations relative to
partnerships and sole proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.
41
Question 3
Which is not one of the three primary business
activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
42
Question 4
Which of the following is not a correct
representation of the accounting equation?
a. Assets Liabilities Stockholders Equity
b. Assets - Liabilities Stockholders Equity
c. Assets Stockholders Equity Liabilities
d. Assets - Stockholders Equity Liabilities
43
Question 5
Using the accounting equation, answer the
following question.
If Liabilities 10,000 and
Stockholders Equity 20,000
Then Assets
44
Question 6
Using the accounting equation, answer the
following question.
If Assets 75,000
And Liabilities 35,000
Then Stockholders Equity
45
ANSWERS
46
Question 1
Which is not one of the three forms of business
organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
47
Question 2
Which is an advantage of corporations relative to
partnerships and sole proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.
48
Question 3
Which is not one of the three primary business
activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
49
Question 4
Which of the following is not a correct
representation of the accounting equation?
a. Assets Liabilities Stockholders Equity
b. Assets - Liabilities Stockholders Equity
c. Assets Stockholders Equity Liabilities
d. Assets - Stockholders Equity Liabilities
50
Question 5
Using the accounting equation, answer the
following question.
If Liabilities 10,000 and
Stockholders Equity 20,000
Then Assets
51
Question 6
Using the accounting equation, answer the
following question.
If Assets 75,000
And Liabilities 35,000
Then Stockholders Equity
52
Supplements to the Financial Statements in an
Annual Report
  • Management Discussion and Analysis
  • Notes to Financial Statements
  • Auditors report

53
Managements Discussion and Analysis covers three
items
  1. Liquidity
  2. Capital resources
  3. Results of operations

54
Managements Discussion and Analysis
55
Notes to Financial Statements
  • Explanatory notes and supplementary schedules
  • Clarifies information in financial statements
  • Expands with additional detail
  • Describes accounting policies
  • Explains uncertainties and contingencies

56
Notes to Financial Statements
57
Auditors Report
  • Certified Public Accountant CPA
  • Auditor (CPA) conducts independent examination of
    financial statements
  • Fair representation?
  • Follow generally accepted accounting principles
    (GAAP)?
  • Unqualified opinion

58
Auditors Report
59
Problem CSU Corporation
  • CSU begins on Jan. 1, 2007
  • For year ended Dec. 31, 2007, prepare
  • Income statement
  • Retained earnings statement
  • Balance sheet

60
Problem CSU Corporation
  • Action step 1 Report the revenues expenses for
    a period of time, Income Statement

61
Problem CSU Corporation
  • Action step 1 Report the revenues expenses for
    a period of time, Income Statement

62
Problem CSU Corporation
Create the heading
Name of the company
CSU Corporation Income Statement For the Year
Ended December 31, 2007
Name of the statement
Period of time
63
Problem CSU Corporation
CSU Corporation Income Statement For the Year
Ended December 31, 2007 Revenues Service
revenue 17,000
List the revenues Use dollar signs to denote U.S.
currency
64
Problem CSU Corporation
CSU Corporation Income Statement For the Year
Ended December 31, 2007 Revenues Service
revenue 17,000 Expenses Rent
expense 9,000 Insurance expense
1,000 Supplies expense 200 Total
expenses 10,200
________
List the expenses underline sub-totals
65
Problem CSU Corporation
CSU Corporation Income Statement For the Year
Ended December 31, 2007 Revenues Service
revenue 17,000 Expenses Rent
expense 9,000 Insurance expense
1,000 Supplies expense 200 Total
expenses 10,200 Net Income
6,800 Calculate net income revenues - expenses
________
________
________
________
66
Problem CSU Corporation
  • Action step 2 Show amounts and causes of changes
    in retained earnings
  • Use Net Income from Income Statement
  • Dividends

67
Problem CSU Corporation
CSU Corporation Retained Earnings Statement For
the Year Ended December 31, 2007 Retained
earnings, January 1 0 Add Net
income 6,800 6,800 Less
Dividends 600 Retained earnings,
Dec. 31 6,200
______
68
Problem CSU Corporation
  • Action step 3 Present assets and claims to those
    assets at a specific point in time on the
    Balance Sheet
  • Use 6,200 Retained earnings from previous
    statement!

69
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