Accounting in Business Chapter 1 PDF

1-1 Accounting in Business Chapter 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA...

1-1 Accounting in Business Chapter 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.  1-2 C1 Accounting in Business  1-3 C1 Importance of Accounting For example, the sale Keep a chronological Prepare reports such as by Apple of an iPhone. log of transactions. financial statements.  1-4 C1 Users of Financial 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.  1-5 Opportunities in Accounting 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.  1-6 C3 Ethics – A Key Concept 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.  Generally Accepted 1-7 C4 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.  1-8 C3 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  1-9 C4 International Standards In today’s global economy, there is increased demand by external users for comparability in accounting reports. This demand often arises when companies wish to raise money from lenders and investors in different countries. International Accounting International Financial Standards Board (IASB) Reporting Standards (IFRS) An independent group Identify preferred accounting (consisting of individuals practices from many countries), issues International Financial Reporting Standards (IFRS) Differences between U.S. GAAP and IFRS are decreasing as the FASB and IASB pursue a convergence process aimed to achieve a single set of accounting standards for global use.  1 - 10 C4 Conceptual Framework and Convergence  Principles and 1 - 11 C4 Assumptions of Accounting General principles are the Specific principles are detailed basic assumptions, concepts, rules used in reporting and guidelines for preparing business transactions and financial statements. General events. Specific principles principles stem from long- arise more often from the used accounting practices. rulings of authoritative  1 - 12 C4 Accounting Principles Cost Principle Accounting information is based on actual cost. Actual cost is considered objective. Matching Principle Full Disclosure Principle A company must record its expenses A company is required to report the details incurred to generate the revenue behind financial statements that would reported. impact users’ decisions.  1 - 13 C4 Accounting Assumptions Time Period Assumption Presumes that the life of a company can be divided into time periods, such as months and years.  1 - 14 C4 Proprietorship, Partnership, and Corporation Here are some of the major attributes of proprietorships, partnerships, and corporations:  1 - 15 C4 Sarbanes–Oxley (SOX) Congress passed the Sarbanes–Oxley Act to help curb financial abuses at companies that issue their stock to the public. SOX requires that these public companies apply both accounting oversight and stringent internal controls. The desired results include more transparency, accountability, and truthfulness in reporting transactions.  Dodd-Frank Wall Street 1 - 16 Reform and Consumer Protection Act The Act was designed to: 1.promote accountability and transparency in the financial system, 2.put an end to the notion of “too big to fail,” 3.protect the taxpayer by ending bailouts, and 4.protect consumers from abusive financial services.  1 - 17 A1 Transaction Analysis and the Accounting Equation The Accounting Equation Expanded Accounting Equation: Net Income  1 - 18 P1 Transaction Analysis Transaction 1 On December 1, Chas Taylor personally invests $30,000 cash in FastForward and deposits the cash in a bank account opened under the name of FastForward. The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity)  1 - 19 P1 Transaction Analysis Transaction 2 FastForward uses $2,500 of its cash to buy supplies of brand name footwear for performance testing over the next few months. The accounts involved are: (1) Cash (asset) (2) Supplies (asset)  1 - 20 P1 Transaction Analysis Transaction 3 FastForward spends $26,000 to acquire equipment for testing footwear. This is an exchange of one asset, cash, for another asset, equipment. The equipment is an asset because of its expected future benefits from testing footwear. The accounts involved are: (1) Cash (asset) (2) Equipment (asset)  1 - 21 P1 Transaction Analysis Transaction 4 Taylor decides more supplies of footwear and accessories are needed. These additional supplies total $7,100, but as we see from the accounting equation, FastForward has only $1,500 in cash. Taylor arranges to purchase them on credit from CalTech Supply Company.The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)  1 - 22 P1 Transaction Analysis Transaction 5 In one of its first jobs, FastForward provides consulting services to a powerwalking club and immediately collects $4,200 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)  1 - 23 P1 Transaction Analysis Transaction 6 and 7 FastForward pays $1,000 rent and the biweekly $700 salary of the company’s only employee. The accounts involved are: (1) Cash (asset) (2) Expenses (equity)  1 - 24 P1 Transaction Analysis Transaction 8 FastForward provides consulting services of $1,600 and rents its test facilities for $300 to a podiatric services center. The center is billed for the $1,900 total. This transaction results in a new asset, called accounts receivable, from this client. The accounts involved are: (1) Accounts Receivable (asset) (2) Revenues (equity)  1 - 25 P1 Transaction Analysis Transaction 9 The podiatric center pays $1,900 to FastForward 10 days after it is billed for consulting services. The accounts involved are: (1) Cash (asset) (2) Accounts Receivable (asset)  1 - 26 P1 Transaction Analysis Transaction 10 FastForward pays CalTech Supply $900 cash as partial payment for its earlier $7,100 purchase of supplies, leaving $6,200 unpaid. The accounts involved are: (1) Cash (asset) (2) Accounts Payable (liability)  1 - 27 P1 Transaction Analysis Transaction 11 The owner of FastForward withdraws $200 cash for personal use. The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity)  1 - 28 P1 Summary of Transactions  1 - 29 P2 Financial Statements The four financial statements and their purposes are: 1. Income statement — describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. Statement of owner’s equity— explains changes in equity from net income (or loss) and from any owner investments and withdrawals 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)  1 - 30 P2 Income Statement The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.  1 - 31 P2 Statement of Owner’s Equity The statement of owner’s equity reports information about how equity changes over the reporting period. Net income from the income statement.  1 - 32 P2 Balance Sheet The balance sheet describes a company’s financial position at a point in time.  1 - 33 P2 Statement of Cash Flows  1 - 34 Global View Basic Principles Neither U.S. GAAP nor IFRS specifies particular account names nor the detail required. IFRS does require certain minimum line items be reported in the balance sheet along with other minimum disclosures that U.S. GAAP does not. On the other hand, U.S. GAAP requires disclosures for the current and prior two years for the income statement, statement of cash flows, and statement of retained earnings (equity), while IFRS requires disclosures for the current and prior year. Still, the basic principles behind these two systems are similar.  1 - 35 Global View Transaction Analysis Both U.S. GAAP and IFRS apply transaction analysis identically as shown in this chapter. Although some variations exist in revenue and expense recognition and other principles, all of the transactions in this chapter are accounted for identically under these two systems. It is often said that U.S. GAAP is more rules-based whereas IFRS is more principles-based. The main difference on the rules versus principles focus is with the approach in deciding how to account for certain transactions. Under U.S. GAAP, the approach is more focused on strictly following the accounting rules;  1 - 36 Global View Financial Statements Both U.S. GAAP and IFRS prepare the same four basic financial statements. To illustrate, a condensed version of Piaggio’s income statement follows (numbers are in Euros thousands).  1 - 37 Global View Status of IFRS Adoption  1 - 38 A2 Return on Assets Return on assets (ROA) is stated in ratio form as income divided by assets invested. Net income Return on assets = Average total assets Dell  1 - 39 A3 Appendix 1A Return and Risk Analysis Risk is the Many different uncertainty about returns may the return we will be reported. earn. The lower the risk, the lower our expected return. ROA Interest return on savings accounts. Interest return on corporate bonds.  1 - 40 A3 Appendix 1B Business Activities and the Accounting Equation 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. Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services.  1 - 41 End of Chapter 1