Introduction to Digital Management - 2 PDF

Introduction to digital management - 2 Prof. Maurizio Massaro Chapter 1 Accounting in Business Chapter 1 Chapter 1 Learning Objectives CONCEPTUAL C1 Explain the purpose and importance of accounting. C2 Identify users and uses of, and opportunities in, accounting. C3 Explain why ethics are c...

Introduction to digital management - 2 Prof. Maurizio Massaro Chapter 1 Accounting in Business Chapter 1 Chapter 1 Learning Objectives CONCEPTUAL C1 Explain the purpose and importance of accounting. C2 Identify users and uses of, and opportunities in, accounting. C3 Explain why ethics are crucial to accounting. C4 Explain generally accepted accounting principles and define and apply several accounting principles. C5 Appendix 1B Identify and describe the three major activities of organizations. ANALYTICAL A1 Define and interpret the accounting equation and each of its components. A2 Compute and interpret return on assets. A3 Appendix 1A—Explain the relation between return and risk. PROCEDURAL P1 Analyze business transactions using the accounting equation. P2 Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education 3  Learning Objective C1 Explain the purpose and importance of accounting. © McGraw-Hill Education 4  1-5 Importance of Accounting Exhibit 1.1 For example, the sale Keep a chronological Prepare reports such as by Apple of an iPhone. log of transactions. financial statements. Accounting is an information and measurement system that identifies, records, and communicates an organization’s business activities. © McGraw-Hill Education 5 Learning Objective C1: Explain the purpose and importance of accounting.  1-6 Solve the gift problem Stay in the shop Leave the shop 6  Learning Objective C2 Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education 7  1-8 Users of Acccounting Information Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Accounting serves many users who can be divided into two groups: external users and internal users. Lenders Research and development managers External auditors Purchasing managers Shareholders Human resource managers Board of directors Marketing managers Regulators Production managers Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education 8  1-9 Opportunities in Accounting Exhibit 1.2 Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we use accounting. Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education 9  Learning Objective C3 Explain why ethics are crucial to accounting. © McGraw-Hill Education 10  1 - 11 Ethics – A Key Concept Exhibit 1.5 The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. Learning Objective C3: Explain why ethics are crucial to accounting. © McGraw-Hill Education 11  1 - 12 Fraud Triangle Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization. Envision a way to commit Fails to see the criminal fraud with a low perceived nature of the fraud or risk of getting caught justifies the action Must have some pressure to commit fraud, like unpaid bills © McGraw-Hill Education 12 Learning Objective C3: Explain why ethics are crucial to accounting.  1 - 13 Sarbanes–Oxley (SOX) Congress passed the Sarbanes–Oxley Act to help stop financial abuses at companies that issue public stock. SOX requires documentation and verification of internal controls and emphasizes effective internal controls. Failure to comply can lead to penalties and criminal prosecution of executives. Learning Objective C3: Explain why ethics are crucial to accounting. © McGraw-Hill Education 13  1 - 14 Dodd-Frank Wall Street Reform and Consumer Protection Act This act has two important provisions: 1. Clawback provision, which mandates recovery of excessive pay and 2. Whistleblower provision whereby the SEC will pay whistleblowers 10% to 30% of sanctions exceeding $1,000,000. Learning Objective C3: Explain why ethics are crucial to accounting. © McGraw-Hill Education 14  Let’s see if you got it Which of the following is not true regarding ethics: A. Ethics are beliefs that distinguish right from wrong. B. Good ethics are good business. C. Ethics do not affect the operations or outcome of a company. (T) D. Are critical in accounting. E. Ethics are accepted standards of good and 15  Learning Objective C4 Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 16  1 - 17 Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP aims to make information relevant, reliable, and comparable. Reliable information is trusted by users. Relevant information Comparable information affects decisions is helpful in contrasting of users. organizations. Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education17  1 - 18 International Standards In today’s global economy, there is increased demand by external users for comparability in accounting reports. International Accounting International Financial Standards Board (IASB) Reporting Standards (IFRS) Issues International Identify preferred accounting Financial Reporting practices Standards (IFRS) 18 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  1 - 19 Conceptual Framework Exhibit 1.6 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 19  1 - 20 Principles, Assumptions and Constraint Exhibit 1.7 General principles are the Specific principles are detailed rules assumptions, concepts, and used in reporting business guidelines for preparing financial transactions and events. statements. Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 20  1 - 21 Accounting Principles Measurement Principle Revenue Recognition Principle (Cost Principle) 1. Recognize revenue when goods or Accounting information is based on services are provided to customers actual cost. Actual cost is and considered objective. 2. at an amount expected to be received from the customer. Expense Recognition Principle Full Disclosure Principle (Matching Principle) A company reports the details behind A company records its expenses financial statements that would impact incurred to generate the revenue users’ decisions in the notes to the reported. financial statements. Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 21  1 - 22 Accounting Assumptions Going-Concern Assumption Monetary Unit Assumption The business is presumed to Transactions and events are continue operating instead of being expressed in monetary, or closed or sold. money, units. Business Entity Assumption Time Period Assumption A business is accounted for The life of a company separately from other business can be divided into time periods, entities, including its owner. such as months and years. Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 22  1 - 23 Proprietorship, Partnership, and Corporation Here are some of the major attributes of sole proprietorships, partnerships, corporations and limited liability companies (LLC): Exhibit 1.8 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 23  Accounting Constraint Cost-benefit Only information with benefits of disclosure greater than the cost need be disclosed. Materiality Only information that would influence the decisions of a reasonable person need be disclosed. 24 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  Learning Objective A1 Define and interpret the accounting equation and each of its components. © McGraw-Hill Education 25  1 - 26 Business Transaction and Accounting The Accounting Equation Assets = Liabilities + Equity Expanded Accounting Equation: Net Income Learning Objective A1: Define and interpret the accounting equation and each of its components. © McGraw-Hill Education 26  Provide some examples Assets Liabilities Equity 27  Provide some examples of revenues or expenses Revenues Expenses 28  Answer the question If assets are 99,000 and liabilities are 32,000, then Equity equals: (67,000) 29  Learning Objective P1 Analyze business transactions using the accounting equation. © McGraw-Hill Education 30  Transaction 1: Investment by Owner Chas Taylor invests $30,000 cash to start a corporation named FastFoward. The accounts involved are: (1) Cash (asset) (2) Common Stock (equity) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 31  Accounting Equation 1 Chas Taylor invests $30,000 cash to start the business, Fast Forward. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock (1) $ 30,000 $ 30,000 $ 30,000 $ - $ - $ - $ - $ 30,000 $ 30,000 = $ 30,000 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 32  Transaction 2: Purchase Supplies for Cash Company purchased supplies paying $2,500 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 33  Accounting Equation 2 Company purchased supplies paying $2,500 cash. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock (1) $ 30,000 $ 30,000 (2) (2,500) $ 2,500 Accounting Equation must remain in balance!! $ 27,500 $ 2,500 $ - $ - $ - $ 30,000 $ 30,000 = $ 30,000 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 34  Transaction 3: Purchase Equipment for Cash Purchased equipment for $26,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 35  Accounting Equation 3 Purchased equipment for $26,000 cash. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock (1) $ 30,000 $ 30,000 (2) (2,500) $ 2,500 (3) (26,000) $ 26,000 Accounting Equation still remains in balance!! $ 1,500 $ 2,500 $ 26,000 $ - $ - $ 30,000 $ 30,000 = $ 30,000 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 36  Transaction 4: Purchase Supplies on Credit Purchased supplies of $7,100 on credit. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 37  Accounting Equation 4 Purchased Supplies of $7,100 on credit. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock (1) $ 30,000 $ 30,000 (2) (2,500) $ 2,500 (3) (26,000) $ 26,000 Accounting Equation still (4) 7,100 $ 7,100 remains in balance!! $ 1,500 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 37,100 = $ 37,100 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 38  Transaction Analysis: Revenues, Expenses and Withdrawals Now, let’s look at transactions involving revenues, expenses and dividends. Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 39  Transaction 5: Provide Services for Cash Provided consulting services to a customer and received $4,200 cash right away. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 40  Accounting Equation 5 Provided consulting services to a customer and received $4,200 cash right away. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock Revenue Bal. $ 1,500 $ 9,600 $ 26,000 $ 7,100 $ 30,000 (5) 4,200 $ 4,200 $ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $ 41,300 = $ 41,300 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 41  Transactions 6 and 7: Payment of Expenses in Cash Paid rent of $1,000 and salaries of $700 to employees. The accounts involved are: (1) Cash (asset) (2) Rent expense (equity) (3) Salaries expense (equity) Remember that the balance in the Expense accounts actually increase. But, total Equity decreases, because expenses reduce equity. Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 42  Accounting Equation 6 and 7 Paid rent of $1,000 and salaries of $700 to employees. Assets = Liabilities + Equity Accounts Notes Common Cash Supplies Equipment Payable Payable Stock Revenue Expenses Bal. $ 5,700 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (6) (1,000) (1,000) (7) (700) $ (700) $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $ (1,700) $ 39,600 = $ 39,600 Remember that expenses decrease equity. Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 43  Transaction 8: Provide Services and Facilities for Credit Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit. The accounts involved are: (1) Accounts receivable (asset) (2) Consulting Revenues (equity) (3) Rental Revenue (equity) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 44  Accounting Equation 8 Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit. Assets = Liabilities + Equity Accounts Accounts Common Cash Receivable Supplies Equipment Payable Stock Revenue Expenses Bal. $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700) (8) 1,900 $ 1,600 300 $ 4,000 $ 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700) $ 41,500 = $ 41,500 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 45  Transaction 9: Receipt of Cash from Accounts Receivable Client in transaction 8 pays $1,900 for consulting services. The accounts involved are: (1) Cash (asset) (2) Accounts receivable (asset) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 46  Accounting Equation 9 Client in transaction 8 pays $1,900 for consulting services. Assets = Liabilities + Equity Accounts Accounts Common Cash Receivable Supplies Equipment Payable Stock Revenue Expenses Bal. $ 4,000 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700) (9) 1,900 (1,900) $ 1,600 300 $ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700) $ 41,500 = $ 41,500 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 47  Transaction 10: Payment of Accounts Payable FastForward pays $900 as partial payment for supplies purchased in transaction 4. The accounts involved are: (1) Cash (asset) (2) Accounts payable (liability) Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 48  Accounting Equation 10 FastForward pays $900 as partial payment for supplies purchased in transaction 4. Assets = Liabilities + Equity Accounts Accounts Common Cash Receivable Supplies Equipment Payable Stock Revenue Expenses Bal. $ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700) (10) (900) (900) $ 1,600 300 $ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 6,100 $ (1,700) $ 40,600 = $ 40,600 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 49  Transaction 11: Payment of Cash Dividend to Owner Owner withdraws $200 cash for personal use. The accounts involved are: (1) Cash (asset) (2) Dividends (equity) Remember that the Dividends account actually increases (just like our Expense accounts). But, total Equity decreases because dividends cause equity to go down!! Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 50  Accounting Equation 11 Owner withdraws $200 cash for personal use. Assets = Liabilities + Equity Accounts Accounts Common Cash Receivable Supplies Equipment Payable Stock Dividends Revenue Expenses Bal. $ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 4,200 (1,700) (11) (200) (200) $ 1,600 300 $ 4,800 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ (200) $ 6,100 $ (1,700) $ 40,400 = $ 40,400 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 51  Summary of Transactions Exhibit 1.9 Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 52  Let’s practice and see if you got it Saddleback Company paid off $30,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation? Assets, $30,000 decrease; liabilities, $30,000 decrease. (T) Assets, $30,000 decrease; liabilities, $30,000 increase. Assets, $30,000 increase; equity, $30,000 increase. Assets, $30,000 decrease; equity $30,000 decrease. Liabilities, $30,000 decrease; equity, $30,000 increase. 53  Let’s practice and see if you got it Purchased supplies for 7K paid on account Provided services on account for 10K Paiment of expenses for 2K on cash 54  Learning Objective P2 Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education 55  1 - 56 Financial Statements The four financial statements and their purposes are: 1. Income statement — describes a company’s revenues and expenses and computes net income or loss over a period of time. 2. Statement of retained earnings — explains changes in retained earnings from net income (or loss) and from any dividends over a period of time. 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. © McGraw-Hill Education 56 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.  Exhibit 1.10: Financial Statements and Their Links – Part 1 1 - 57 (cont. next slide) 57 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education  Exhibit 1.10: Financial Statements and Their Links – Part 2 1 - 58 58 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education  Learning Objective A2 Compute and interpret return on assets. © McGraw-Hill Education 59  1 - 60 Return on Assets Return on assets (ROA) is stated in ratio form as net income divided by the average total assets invested. Net income Return on assets = Average total assets Exhibit 1.12 Learning Objective A2: Compute and interpret return on assets. 60 © McGraw-Hill Education  Learning Objective A3 Appendix 1A Explain the relation between return and risk. 61 © McGraw-Hill Education  1 - 62 Appendix 1A Return and Risk Analysis Many different Risk is the uncertainty Exhibit returns may be about the return we will 1A.1 reported. earn. The lower the risk, the lower our expected return. ROA Interest return on savings accounts. Interest return on corporate bonds. Learning Objective A3: Explain the relation between return and risk. © McGraw-Hill Education 62  Let’s practice Your company had a net income of € 240 million and average total assets of € 2,000 million. Can you calculate its return on asset? (12%) 63  1 - 64 Learning Objective C5 Appendix 1B Identify and describe the three major activities of organizations. 64 © McGraw-Hill Education  1 - 65 Financing Activities One of the three major types of business activities: Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. ▪ Owner financing—resources contributed by the owner along with any income the owner leaves in the organization. ▪ Nonowner financing—resources contributed by creditors (lenders). Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education 65  1 - 66 Investing Activities One of the three major types of business activities: Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. ▪ Asset management—determining the amount and type of assets for operations. ▪ Assets—invested amounts. ▪ Liabilities—creditors’ claims. ▪ Equity—owner’s claim. Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education 66  1 - 67 Operating Activities One of the three major types of business activities: Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. ▪ Strategic management—the process of determining the right mix of operating activities for the type of organization, its plans, and its market. Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education 67  1 - 68 Activities of Organizations Exhibit 1B.1 Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education 68  1 - 69 End of Chapter 1 © McGraw-Hill Education 69