Horngren's Financial & Managerial Accounting Eighth Edition Chapter 1 PDF

Horngren’s Financial & Managerial Accounting Eighth Edition Chapter 1 Accounting in the Business Environment Copyright © 2024, 2020, 201...

Horngren’s Financial & Managerial Accounting Eighth Edition Chapter 1 Accounting in the Business Environment Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Chapter 1 Learning Objectives (1 of 2) 1.1 Explain why accounting is important and list the users of accounting information 1.2 Describe the organizations and rules that govern accounting 1.3 Describe the accounting equation and define assets, liabilities, and equity Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Chapter 1 Learning Objectives (2 of 2) 1.4 Use the accounting equation to analyze transactions 1.5 Prepare financial statements 1.6 Use financial statements and return on assets (ROA) to evaluate business performance Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.1 Explain why accounting is important and list the users of accounting information Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Why Is Accounting Important? Accounting is the information system that: Measures business activities Processes the information into reports Communicates the results to decision makers Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-1 Pathways Vision Model This work is by The Pathways Commission. The Pathways Vision Model: AI artwork: AAA Commons. American Accounting Association. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Decision Makers: The Users of Accounting Information (1 of 2) Exhibit F:1-2 Decision Making: Financial Versus Managerial Accounting Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Decision Makers: The Users of Accounting Information (2 of 2) Financial accounting provides information for external decision makers, such as: – Outside investors who own a portion of the business – Creditors (or lenders) to whom the business owes money – Taxing authorities (the government), to whom the business owes taxes Managerial accounting provides information to internal decision makers, such as: – Managers – Employees – Individuals – Businesses Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Accounting Matters Types of accountants: Certified Public Accountants (CPAs) serve the general public. Chartered Global Management Accountants (CGMAs) have advanced knowledge in finance, operations, strategy, and management. Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge and often work for a single company. Certified Financial Planners (CFPs) help individuals budget, plan for retirement, save for education, and manage their finances. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-3 Comparison of Accounting Positions Position Job Description Salary Range Chief Financial Officers (CFO) Has primary responsibility for the company's $125,250-$247,500 finances including financial planning, record keeping, and financial reporting. Controllers Compile financial statements, interact with $107,250-$203,750 auditors, and oversee regulatory reporting. Business systems analysts Use accounting knowledge to create $45,750-$146,000 computer systems. Tax accountants Help companies navigate tax laws. $45,250-$ 174,000 Auditors Perform reviews of companies to ensure $41,000-$170,000 compliance to rules and regulations. Cost accountants Typically work in a manufacturing business. $55,500-$115,500 Help analyze accounting data. Accounting clerks/ Record financial transactions and help $31,500-$58,500 Bookkeepers prepare financial records. Based on Robert Half’s 2022 Salary Guide https://www.roberthalf.com/salary-guide Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Data Analytics in Accounting Accountants need to understand how technology is used to process financial information Accounting and finance individuals actively work with information technology teams to develop accounting systems. Artificial intelligence, cloud-based systems, and robotic process automation are all changing the way companies handle financial information. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.2 Describe the organizations and rules that govern accounting Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Are the Organizations and Rules That Govern Accounting? (1 of 3) Governing organizations: The Financial Accounting Standards Board (FASB) is a private organization that oversees creation and governance of accounting standards. The Securities and Exchange Commission (SEC) is a governmental agency that oversees the U.S. financial markets. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Are the Organizations and Rules That Govern Accounting? (2 of 3) Accounting guidelines are called Generally Accepted Accounting Principles (GAAP). Useful accounting information must: – Be relevant, allowing users to make a decision – Have faithful representation by being complete, neutral, and free from error Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved International Financial Reporting Standards International Financial Reporting Standards (IFRS) are a set of global accounting guidelines. Used or required by more than 166 nations/jurisdictions Published by the International Accounting Standards Board (IASB) Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Economic Entity Assumption (1 of 5) An organization that stands apart as a separate economic unit follows the economic entity assumption. An Economic Entity can be a: – Sole Proprietorship – Partnership – Corporation – Limited-Liability Company (LLC) Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Economic Entity Assumption (2 of 5) Exhibit F:1-4 Business Organizations Limited-Liability Blank Sole Proprietorship Partnership Corporation Company (LLC) Definition A business with a A business with two A business organized A company in which single owner or more under each owners and not state law that is a member is only liable organized as separate for his a corporation legal entity or her own actions Number of owners One (called the Two or more (called One or more (called One or more (called proprietor) partners) stockholders) members or partners) Life of the Terminates at Terminates at a Indefinite Indefinite organization owner’s choice partner’s or death choice or death Personal liability The owner is The partners are Stockholders are not Members are not of the owner(s) personally liable. personally liable. personally personally for the business’s Liable. Liable. debts Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Economic Entity Assumption (3 of 5) [Exhibit F:1-4 Continued] Limited-Liability Blank Sole Proprietorship Partnership Corporation Company (LLC) Taxation Not separate taxable Partnership is not Separate taxable LLC is not taxed. entities. taxed. Instead entity. Corporation Instead members pay The owner pays tax partners pay tax on pays tax. tax on their on the their share of the share of earnings. proprietorship’s earnings. earnings. Type of business Small businesses Professional From small business An alternative to the organizations to large multinational partnership of physicians, businesses attorneys, and accountants Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Economic Entity Assumption (4 of 5) Features of a corporation: Separate legal entity Continuous life and transferability of ownership No mutual agency Limited liability of stockholders (owners of the corporation) Separation of ownership and management Corporate taxation Government regulation Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Economic Entity Assumption (5 of 5) Organization of a corporation: Creation begins when organizers (called incorporators) obtain a charter from the state. – The charter includes authorization for a certain number of shares of stock, which represent ownership in the corporation. Incorporators also agree on the bylaws that guide the organization. Once created, stockholders control the corporation through an elected board of directors. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-5 Structure of a Corporation Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Are the Organizations and Rules That Govern Accounting? (3 of 3) In addition to the economic entity principle, the following principles are part of GAAP: The cost principle states that acquired assets and services should be recorded at their actual cost. The going concern assumption assumes that the entity will remain in operation for the foreseeable future. The monetary unit assumption requires that the items on the financial statements be measured in terms of a monetary unit. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Ethics in Accounting and Business An audit is an examination of a company’s financial statements and records. The Sarbanes-Oxley Act (SOX) requires companies to review internal controls. The Public Company Accounting Oversight Board (PCAOB) monitors the work of independent accountants who audit public companies. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.3 Describe the accounting equation and define assets, liabilities, and equity Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Is the Accounting Equation? The accounting equation is the basic tool of accounting, measuring the resources of the business and the claims to those resources. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Assets An asset is an economic resource that is expected to benefit the business in the future. Examples: – Cash – Merchandise Inventory – Furniture – Land Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Liabilities Liabilities are debts that are owed to creditors. Many liabilities have the word payable in their titles. Examples: – Accounts Payable – Notes Payable – Salaries Payable Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Equity (1 of 3) The owners’ claims to the assets of the business are called equity (also called stockholders’ equity), which has two components: 1. Contributed capital: – Also called paid-in capital, contributed capital is the amount invested in the corporation by its owners, the stockholders. – Common stock represents the basic ownership of every corporation. 2. Retained earnings: – Equity earned from profitable operations that is not distributed to shareholders Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Equity (2 of 3) Increases in equity result from: – Contributed capital (owner contributions) – Revenues, which are amounts earned from delivering goods or services o customers Decreases in equity result from: – Dividends, which are distributions of earnings to stockholders – Expenses or the costs of selling goods or services Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Equity (3 of 3) The accounting equation is expanded to show the components of equity: Net income – Revenues > Expenses Net loss – Revenues < Expenses Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.4 Use the accounting equation to analyze transactions Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Analyze a Transaction? A transaction is any event that affects the financial position of the business and can be measured with faithful representation. Step 1: Identify the accounts and account type. Step 2: Decide if each account increases or decreases Step 3: Determine if the accounting equation is in balance Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (1 of 9) Transaction 1—Stockholder Contribution Sheena Bright contributes $30,000 cash to Smart Touch Learning, a corporation, in exchange for stock. The effect of this transaction on the accounting equation is: Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (2 of 9) Transaction 2—Purchase of Land for Cash Smart Touch Learning purchases land for an office location, paying cash of $20,000. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (3 of 9) Transaction 3—Purchase of Office Supplies on Account Smart Touch Learning buys office supplies on account agreeing to pay $500 within 30 days. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (4 of 9) Transaction 4—Earning of Service Revenue for Cash Smart Touch Learning earns service revenue by providing training services for clients. The business collects $5,500 revenue in cash. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (5 of 9) Transaction 5—Earning of Service Revenue on Account Smart Touch Learning performs a service for clients who do not pay immediately. The clients promise to pay $3,000 within one month. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (6 of 9) Transaction 6—Payment of Expenses with Cash Smart Touch Learning pays $3,200 in cash expenses: $2,000 for office rent and $1,200 for employee salaries. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (7 of 9) Transaction 7—Payment on Account (Accounts Payable) Smart Touch Learning pays $300 to the store from which it purchased office supplies in Transaction 3. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (8 of 9) Transaction 8—Collection on Account (Accounts Receivable) Smart Touch Learning now collects $2,000 from the client from Transaction 5. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Transaction Analysis for Smart Touch Learning (9 of 9) Transaction 9—Payment of Cash Dividend Smart Touch Learning distributes a $5,000 cash dividend to the stockholder, Sheena Bright. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-6 Analysis of Transactions, Smart Touch Learning (1 of 2) 1. Received $30,000 cash and issued common stock to Sheena Bright, stockholder. 2. Paid $20,000 cash for land. 3. Bought $500 of office supplies on account. 4. Received $5,500 cash from clients for service revenue earned. 5. Performed services for clients on account, $3,000. 6. Paid cash expenses: office rent, $2,000; employee salaries, $1,200. 7. Paid $300 on the accounts payable created in Transaction 3. 8. Collected $2,000 on the accounts receivable created in Transaction 5. 9. Paid cash dividends of $5,000 to stockholder, Sheena Bright. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-6 Analysis of Transactions, Smart Touch Learning (2 of 2) Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.5 Prepare financial statements Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Prepare Financial Statements? (1 of 2) Exhibit F:1-7 Financial Statements Financial Statement Information Provided and Purpose How Is It Prepared? Income Provides information about profitability for a Revenues − Expenses = Net Income Revenu esmi n usExpen ses=NetI n comeo r Net L oss statement particular period for the company or Net Loss Statement of Informs users about how much of the Retained Earnings, Beginning retained earnings were kept and reinvested in the + Net income or − Net loss for the period − Dividends for the period Retaine dEarnings,Beg i ningplusNe t inco meor minusNe t lossfor thep eri o dm inu sDi vid end sf o r thepe r iod=Retaine dEarning s, En ding earnings company = Retained Earnings, Ending Balance sheet Provides valuable information to financial Assets = Liabilities + Stockholders’ statement users about economic resources Equity the company has (assets) as well as debts the company owes (liabilities) and allows decision makers to determine their opinion about the financial position of the company Statement of Reports on a business’s cash receipts and Cash flows from operating activities cash flows cash payments for a period of time Cash flows from investing activities Cash flows from financing activities Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Prepare Financial Statements? (2 of 2) Financial statements are business documents that are used to communicate information needed to make business decisions. The Income Statement reports the net income or net loss of the business for a specific period. The Statement of Retained Earnings reports how the company’s retained earnings balance changed from the beginning to the end of the period. The Balance Sheet reports on the assets, liabilities, and stockholders’ equity of the business as of a specific date. The Statement of Cash Flows reports on a business’s cash receipts and cash payments for a specific period. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-8 Income Statement Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-9 Statement of Retained Earnings Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-10 Statement of Stockholders’ Equity Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-11 Balance Sheet Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:1-12 Statement of Cash Flows Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1.6 Use financial statements and return on assets (ROA) to evaluate business performance Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Use Financial Statements to Evaluate Business Performance? (1 of 2) One of the many tools used to evaluate performance is return on assets. Return on assets (ROA) measures how profitably a company uses it assets. – ROA is calculated by dividing net income by average total assets. Return on assets = Net income/ Average total assets Average total assets = (Beginning total assets + Ending total assets)/2 Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Use Financial Statements to Evaluate Business Performance? (2 of 2) On its 2021 income statement, Pepsico reported net income of $7,618 million. The corporation reported beginning total assets (found on the balance sheet) of $92,918 million and ending total assets of $92,377 million. Pepsico’s return on assets for 2021 is (all amounts in millions): Return on assets = $7,618/(($92,918 + $92,377 ) / 2) = $7,618 / $92,648 * = 0.082 = 8.2% *rounded Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved