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)
2THE PURPOSE OF ACCOUNTING
TO PROVIDE
- FINANCIAL INFORMATION
- ABOUT A BUSINESS
- TO INDIVIDUALS
- AND ORGANIZATIONS
3Forms of Business Organization
- Sole proprietorship
- Partnership
- Corporation
4Sole Proprietorship
- Business owned by one person
- Simple to establish
- Owner controlled
- Tax advantages
- Owner personally liable
- Financing difficult
5Partnership
- Two or more owners
- Simple to establish
- Shared control
- Broader skills resources
- Tax advantages
- Personal liability
6Corporation
- Separate legal entity owned by stockholders
- Easy to transfer ownership
- Greater capital raising potential
- Lower legal liability
- Unfavorable tax treatment
7THE ACCOUNTING PROCESS
Accounting Is A System Of
- Gathering financial information
- About a business
- And reporting it to users
It is accomplished in 6 steps
8STEP ONE
ANALYZING
Looking at events that have taken place and
thinking about how they affect the business
9STEP TWO
RECORDING
Entering financial information about events into
the accounting system
10STEP THREE
CLASSIFYING
Sorting and grouping similar items together
11STEP FOUR
SUMMARIZING
Bringing the various items of information
together to determine a result
12STEP FIVE
REPORTING
Giving the results to interested parties
13STEP SIX
INTERPRETING
Deciding the meaning and importance of the
information in various reports
14Study 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.
15Study Objectives of Chapter 1
- Identify the users and uses of accounting
information. - Explain the 3 principal business activities that
affect cash.
16Define some terms
- Sales
- Revenue
- Expense
- Asset
- Liability
- Owners Equity
17Content 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
18Four Financial Statements
- Income Statement
- Retained Earnings Statement
- Balance Sheet
- Statement of Cash Flows
Over Time
Over Time
At some point in Time
Over Time
19Income Statement
- Did you make any money???
- Summarizes revenues and expenses for period
month, quarter, year. - If revenue gt expense Net Income.
20Income Statement
Do this statement first!
21Retained Earnings Statement
- Shows changes in retained earnings for period
month, quarter, year - Beginning balance
- Add Net Income from income statement.
- Deduct Dividends
- Ending balance
22Retained Earnings Statement
Do this statement second!
23Balance 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!
24Balance 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!
27Statement of Cash Flows..
Agrees with Balance Sheet
28 Three Business Activities that affect Cash
- Operating
- Investing
- Financing
29Operating 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!
30Operating Activities
- What the business does to make money
- Selling goods
- Providing services
- Manufacturing
- Cost of Sales
- Advertising
- Paying employees
- Paying utilities
31Investing Activities
- Investments in the companys future (Obtaining
resources or assets to operate the business) - Land
- Buildings
- Vehicles
- Computers
- Furniture
- Equipment
32Financing 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
35Assets
- Resources owned by the business to be used to
generate future revenue - Cash
- Accounts receivable
- Inventories
- Furniture and fixtures
- Equipment
- Supplies
36Liabilities
- Obligations or debts of the business
- Notes payable
- Accounts payable
- Interest payable
- Salaries payable
- Unearned revenue
37Stockholders Equity
- Ownership claims on assets
- Paid-in capital
- Common stock
- Retained earnings
38 Basic Accounting Equation
Assets Liabilities Stockholders Equity
39Question 1
Which is not one of the three forms of business
organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
40Question 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.
41Question 3
Which is not one of the three primary business
activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
42Question 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
43Question 5
Using the accounting equation, answer the
following question.
If Liabilities 10,000 and
Stockholders Equity 20,000
Then Assets
44Question 6
Using the accounting equation, answer the
following question.
If Assets 75,000
And Liabilities 35,000
Then Stockholders Equity
45ANSWERS
46Question 1
Which is not one of the three forms of business
organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
47Question 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.
48Question 3
Which is not one of the three primary business
activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
49Question 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
50Question 5
Using the accounting equation, answer the
following question.
If Liabilities 10,000 and
Stockholders Equity 20,000
Then Assets
51Question 6
Using the accounting equation, answer the
following question.
If Assets 75,000
And Liabilities 35,000
Then Stockholders Equity
52Supplements to the Financial Statements in an
Annual Report
- Management Discussion and Analysis
- Notes to Financial Statements
- Auditors report
53Managements Discussion and Analysis covers three
items
- Liquidity
- Capital resources
- Results of operations
54Managements Discussion and Analysis
55Notes to Financial Statements
- Explanatory notes and supplementary schedules
- Clarifies information in financial statements
- Expands with additional detail
- Describes accounting policies
- Explains uncertainties and contingencies
56Notes to Financial Statements
57Auditors Report
- Certified Public Accountant CPA
- Auditor (CPA) conducts independent examination of
financial statements - Fair representation?
- Follow generally accepted accounting principles
(GAAP)? - Unqualified opinion
58Auditors Report
59Problem CSU Corporation
- CSU begins on Jan. 1, 2007
- For year ended Dec. 31, 2007, prepare
- Income statement
- Retained earnings statement
- Balance sheet
60Problem CSU Corporation
- Action step 1 Report the revenues expenses for
a period of time, Income Statement
61Problem CSU Corporation
- Action step 1 Report the revenues expenses for
a period of time, Income Statement
62Problem 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
63Problem 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
64Problem 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
65Problem 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
________
________
________
________
66Problem CSU Corporation
- Action step 2 Show amounts and causes of changes
in retained earnings - Use Net Income from Income Statement
- Dividends
67Problem 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
______
68Problem 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!
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