Accounting And The Business Environment Lecture 2 PDF

Accounting and the Business Environment Chapter 1 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-1 Learning Objective 2 Describe the organizations and...

Accounting and the Business Environment Chapter 1 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-1 Learning Objective 2 Describe the organizations and rules that govern accounting ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-2  The Organizations That Govern Accounting FASB SEC Financial Accounting Securities and Standards Board Exchange Privately funded Commission Creates the rules and Oversees the US standards that govern financial markets financial accounting ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-3  Generally Accepted Accounting Principles (GAAP) Issued by the FASB. Establishes the rules for Relevant = The info recording transactions and allows users to make preparing financial a decision. statements. Published online as part of Faithfully the Accounting Standards Representative = Codification. The info is complete, Requires that information neutral, and free be useful. from material error. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-4  Accounting Assumptions Economic Entity Cost Assumption Principle Monetary Going Unit Concern Assumption Assumption ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-5  >TRY IT! Match the accounting terminology to the definition Benefit Definition a. Oversees the creation and governance of accounting standards in the United 7. Cost principle States. 8. GAAP b. Requires an organization to be a separate economic unit. 9. Faithful representation c. Oversees US financial markets. d. States that acquired assets and services should be recorded at their actual 10. SEC cost. 11. FASB e. Creates International Financial Reporting Standards. 12. Monetary unit assumption f. The main US accounting rule book. 13. Economic entiry assumption g. Assumes that an entity will remain in operation for the foreseeable future. 14. Going concern assumption h. Assumes that the financial statements are recorded in a monetary unit. 15. IASB i. Requires information to be complete, neutral, and free from material error. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-6  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP 9. Faithful representation 10. SEC 11. FASB 12. Monetary unit assumption 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-7  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation 10. SEC 11. FASB 12. Monetary unit assumption 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-8  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC 11. FASB 12. Monetary unit assumption 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-9  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC c. Oversees US financial markets. 11. FASB 12. Monetary unit assumption 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-10  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC c. Oversees US financial markets. a. Oversees the creation and governance of accounting standards in the United 11. FASB States. 12. Monetary unit assumption 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-11  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error 10. SEC c. Oversees US financial markets. a. Oversees the creation and governance of accounting standards in the United 11. FASB States. 12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit. 13. Economic entiry assumption 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-12  >TRY IT! d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC c. Oversees US financial markets. a. Oversees the creation and governance of accounting standards in the United 11. FASB States. 12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit. 13. Economic entiry assumption b. Requires an organization to be a separate economic unit. 14. Going concern assumption 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-13  >TRY IT! d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC c. Oversees US financial markets. a. Oversees the creation and governance of accounting standards in the United 11. FASB States. 12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit. 13. Economic entiry assumption b. Requires an organization to be a separate economic unit. 14. Going concern assumption g. Assumes that an entity will remain in operation for the foreseeable future. 15. IASB ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-14  >TRY IT! Match the accounting terminology to the definition Benefit Definition d. States that acquired assets and services should be recorded at their actual 7. Cost principle cost. 8. GAAP f. The main US accounting rule book. 9. Faithful representation i. Requires information to be complete, neutral, and free from material error. 10. SEC c. Oversees US financial markets. a. Oversees the creation and governance of accounting standards in the United 11. FASB States. 12. Monetary unit assumption h. Assumes that the financial statements are recorded in a monetary unit. 13. Economic entiry assumption b. Requires an organization to be a separate economic unit. 14. Going concern assumption g. Assumes that an entity will remain in operation for the foreseeable future. 15. IASB e. Creates International Financial Reporting Standards. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-15 Learning Objective 3 Describe the accounting equation, and define assets, liabilities, and equity ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-16  The Accounting Equation Assets = Liabilities + Equity Rule: The Balance Sheet Equation must ALWAYS be in balance. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-17  The Accounting Equation Assets = Liabilities + Equity Assets are economic resources that are expected to benefit the business in the future. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-18  The Accounting Equation Assets = Liabilities + Equity Liabilities are debts that are owed to creditors. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-19  The Accounting Equation Assets = Liabilities + Equity Equity is the owner’s residual claim against the assets of the company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-20  The Accounting Equation Assets = Liabilities + Equity The owner’s claim on the resources increase and Owner’s Capital decrease as the – Owner’s Withdrawals company engages + Revenues in earnings - Expenses activities. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-21  The Accounting Equation Assets = Liabilities + Equity Revenues are economic resources that have been earned by Owner’s Capital delivering products – Owner’s Withdrawals + Revenues or services to - Expenses customers. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-22  The Accounting Equation Assets = Liabilities + Equity Expenses are the costs associated Owner’s Capital with selling goods – Owner’s Withdrawals or services. + Revenues - Expenses ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-23  >TRY IT! Using the expanded accounting equation, solve for the missing amount. Assets $ 71,288 Liabilities 2,260 Owner's Capital ? Owner's Withdrawal 14,420 Revenues 53,085 Expenses 28,675 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-24 >TRY IT! ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-25 Learning Objective 4 Use the accounting equation to analyze transactions ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-26  How Do You Analyze A Transaction? Think of a transaction Is it a transaction? as a very special kind of historical event. ✓Buying a copying 1. It involves the machine for the exchange of economic office for $4,000 resources. cash. 2. We must be able to measure the economic x Meeting with a impact in monetary potential units. customer. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-27  How Do You Analyze A Transaction? Sheena Bright starts a new business named Smart Touch. She puts $30,000 into the business. How does this impact the Accounting Equation? Note: You can make the analysis easier if the first question you ask is whether cash exchanged hands. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-28  How Do You Analyze A Transaction? Next, Smart Touch purchases land for $20,000 cash. In this transaction, all the change occurred on the left side of the equation. One asset was converted into a different asset. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-29  How Do You Analyze A Transaction? In Transaction #3, Smart Touch buys $500 of office supplies, offering to pay in 30 days. Remember, in business it is quite common for a business to purchase something now, and pay for it later. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-30  How Do You Analyze A Transaction? In Transaction #4, Smart Touch provides training services to customers for $5,500 cash. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-31  How Do You Analyze A Transaction? In Transaction #5, Smart Touch performs $3,000 of services for a customer who will pay in one month. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-32  How Do You Analyze A Transaction? In Transaction #6, Smart Touch pays $3,200 in cash expenses; $2,000 for office rent and $1,200 for employee salaries. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-33 How Do You Analyze A Transaction? In Transaction #7, Smart Touch pays $300 to the store from which it purchased office supplies in Transaction #3. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-34  How Do You Analyze A Transaction? In Transaction #8, Smart Touch collects $2,000 from the client for which Smart Touch performed services in Transaction #5. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-35 LO4: How Do You Analyze A Transaction? ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-36 Learning Objective 5 Prepare Financial Statements ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-37  How Do You Prepare Financial Statements? Income Statement These same four Statement of Owner’s Equity basic financial Balance Sheet statements are used by all Statement of companies as Cash Flows the primary means of communicating to stakeholders. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-38  How Do You Prepare Financial Statements? Income Statement Reports the success or failure Statement of Owner’s Equity of the company’s Balance Sheet operations for a period of time. Statement of Cash Flows ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-39 How Do You Prepare Financial Statements? SMART TOUCH LEARNING Income Statement Month Ended November 30, 2014 Revenues Service Revenue $ 8,500 Expenses Rent expense $ 2,000 Salaries Expense 1,200 Total expenses 3,200 Net income $ 5,300 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-40  How Do You Prepare Financial Statements? Income Statement Shows amounts Statement of Owner’s Equity and causes of Balance Sheet changes in owner’s capital during the period. Statement of Cash Flows ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-41  How Do You Prepare Financial Statements? SMART TOUCH LEARNING Statement of Owner's Equity Month Ended November 30, 2014 Bright Capital, November 1, 2014 $ - Owner Contribution 30,000 Net income for the month 5,300 35,300 Owner Withdrawal (5,000) Bright Capital, November 30, 2014 $ 30,300 The ending balance in Bright Capital will also appear in the Equity section of the Balance Sheet. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-42  How Do You Prepare Financial Statements? Income Statement Reports assets and claims to Statement of Owner’s Equity those assets at a Balance Sheet specific point in time. Statement of Cash Flows ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-43  SMART TOUCH LEARNING Balance Sheet November 30, 2014 Assets Cash $ 9,000 Accounts Receivable 1,000 Office Supplies 500 Land 20,000 Total assets $ 30,500 Liabilities Accounts Payable $ 200 Owner's Equity Bright Capital, November 30, 2014 30,300 Total Liabilities and Owner's Equity $ 30,500 Note that the Balance Sheet follows the Accounting Equation. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-44  How Do You Prepare Financial Statements? Income Statement Answers the question of Statement of Owner’s Equity whether the Balance Sheet business generates enough cash to pay its Statement of bills. Cash Flows ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-45  SMART TOUCH LEARNING Statement of Cash Flows Month Ended November 30, 2014 Cash Flows from Operating Activities: Receipts: Collections from customers $ 7,500 Payments: For rent $ (2,000) For salaries (1,200) For office supplies (300) (3,500) Net cash provided by operating activities 4,000 Cash Flows from Investing Activities: Acquisition of land (20,000) Net cash used by investing activities (20,000) Cash Flows from Financing Activities: Owner contribution 30,000 Owner withdrawals (5,000) Net cash provided by financing activities 25,000 Net increase in cash 9,000 Cash balance, November 1, 2014 - Cash balance, November 30, 2014 $ 9,000 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-46 Learning Objective 6 Use financial statements and return on assets (ROA) to evaluate business performance ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-47 How Do You Use Financial Statements to Evaluate Performance? ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-48 End of Chapter 1 ©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-49