Chapter 01

Accounting Information and Decision Making

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Part A

Accounting as a Measurement/Communication

Process

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LO1 Basic Understanding of Accounting

Make Decisions About

Communicate information to:

Activities Measured by:

People Companies

Accountants

Accounting – The language of businessAccounting – The language of business

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Managerial Accounting

deals with the methods accountants use to

provide information to an organization’s internal users; that is, its own

managers.

Managerial Accounting

deals with the methods accountants use to

provide information to an organization’s internal users; that is, its own

managers.

Financial Accounting

measures business activities of a company

and communicates those measurements to

external parties for decision-making

purposes.

Financial Accounting

measures business activities of a company

and communicates those measurements to

external parties for decision-making

purposes.

Focus of the Course

Accounting Categories

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LO2 Business Activities to Measure

Financing activitiesFinancing activities Investing activitiesInvesting activities

Operating activitiesOperating activities

Business ActivitiesInvolves

funding from external sources

Involves funding from

external sources

Involves purchase and sale of long-

term resources

Involves purchase and sale of long-

term resources

Involves transactions in

primary operations of

business

Involves transactions in

primary operations of

business 1-5

Assets Liabilities Stockholders’ Equity= +

Investors and Creditors would like to know aboutInvestors and Creditors would like to know about

Company’s resources

Claims to those resources

Basic Accounting Equation

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Profitability

Revenue > ExpensesRevenue > Expenses

Net Income

Revenue < ExpensesRevenue < Expenses

Net Loss

DividendsDividendsCompany distributes

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Owned by a single person

Legally separate from its owners

Owned by two or more persons

Forms of Business Organizations

Sole ProprietorshipSole Proprietorship PartnershipPartnership

CorporationCorporation

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LO3 Communicating Through Financial Statements

Financial statements are periodic reports published by the company for the purpose of providing information to

external users.

Financial statements are periodic reports published by the company for the purpose of providing information to

external users.

Statement of Stockholders’ EquityIncome Statement

Statement of Cash FlowsBalance Sheet

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Income Statement

Financial statement that reports the

company’s revenues and expenses over an interval of time

Financial statement that reports the

company’s revenues and expenses over an interval of time

Shows whether the company was able to

generate enough revenue to cover the expenses of running

the business

Shows whether the company was able to

generate enough revenue to cover the expenses of running

the business

If Revenues > Expenses

then Net IncomeIf

Revenues < Expensesthen Net Loss

If Revenues > Expenses

then Net IncomeIf

Revenues < Expensesthen Net Loss

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Income Statement for Eagle Golf Academy

Revenues:Service revenue $6,360

Expenses:Salaries expense 3,100Rent expense 500Supplies expense 800Interest expense 100Utilities expense 960Other expense 400

Total expenses 5,860Net income $500

EAGLE GOLF ACADEMYIncome Statement

For the month ended January 31

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Statement of Stockholders’ Equity

Financial statement that summarizes the changes in stockholders’ equity over an

interval of time.

Financial statement that summarizes the changes in stockholders’ equity over an

interval of time.

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Statement of Stockholders’ Equity for Eagle Golf Academy

TotalCommon Retained Stockholders’

Stock Earnings Equity

Beginning balance (Jan. 1) -0- -0- -0-Issuance of common stock $25,000 $25,000

Add: Net income for January $500 $500 Less: Dividends (200) (200)Ending balance (Jan. 31) $25,000 $300 $25,300

EAGLE GOLF ACADEMYStatement of Stockholders’ EquityFor the month ended January 31

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Balance Sheet

Financial statement that presents the financial position of the company on a particular date

Financial statement that presents the financial position of the company on a particular date

Summarized by the basic accounting equation:Assets = Liabilities + Stockholders’ Equity

Summarized by the basic accounting equation:Assets = Liabilities + Stockholders’ Equity

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Balance Sheet for Eagle Golf Academy

Cash $6,200 Accounts payable $2,300 Accounts receivable 2,700 Salaries payable 300Supplies 1,500 Interest payable 100Equipment, net 23,600 Utilities payable 960Other assets 5,500 Notes payable 10,000

Other liabilities 540Total liabilities 14,200

Common stock 25,000Retained earnings 300

Total stockholders’ equity 25,300

Total assets $39,500 Total liabilities and stockholders’ equity $39,500

Stockholders’ Equity

EAGLE GOLF ACADEMY

January 31Balance Sheet

Assets Liabilities

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Statement of Cash Flows

Financial statement that measures activities involving cash receipts and cash payments

over an interval of time.

Financial statement that measures activities involving cash receipts and cash payments

over an interval of time.

Can be classified into three categoriesCan be classified into three categories

Operating cash flowsOperating cash flows Investing cash flowsInvesting cash flows Financing cash flowsFinancing cash flows

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Statement of Cash Flows for Eagle Golf Academy

Cash inflows:From customers $4,200

Cash outflows:For salaries (2800)For rent (6000)

Net cash flows from operating activities ($4,600)

Purchase equipment (24000)Net cash flows from investing activities (24,000)

Issue common stock 25,000Borrow from bank 10,000Pay dividends (200)

Net cash flows from financing activities 34,800Net increase in cash 6,200Cash at the beginning of the month -0-Cash at the end of the month $6,200

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Cash Flows from Operating Activities

EAGLE GOLF ACADEMYStatement of Cash Flows

For the month ended January 31

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Link among Financial Statements

EAGLE GOLF ACADEMY

Income Statement

Revenues $6,360

Expenses 5,860

Net income $ 500

EAGLE GOLF ACADEMY

Statement of Cash Flows

Cash Flows from Operating Activities ($4,600)

Cash Flows from Investing Activities (24,000)

Cash Flows from Financing Activities 34,800

  Net increase in cash 6,200

Cash at the beginning of the year 0

Cash at the end of the year $6,200

EAGLE GOLF ACADEMYStatement of Stockholders’ Equity

CommonStock

RetainedEarnings

TotalStockholders’

Equity

Beginning balance (Jan. 1) -0- -0- -0-

Issuances $25,000 $25,000

Add: Net income 500 500

Less: Dividends (200) (200)

Ending balance (Jan. 31) $25,000 $300 $25,300

EAGLE GOLF ACADEMY

Balance Sheet

Cash $ 6,200 Liabilities $ 14,200

Other assets 33,300 Stockholders’ equity

25,300

Total liabilities and stockholders’ equity $39,500

Total assets $39,500

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Part B

Financial Accounting Information

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LO4 Importance of Financial Accounting

Option A

Option B

Financial Accounting Information

Investors and creditors

InvestmentChoices

?

Financial accounting information is essential to making good business decisions

Financial accounting information is essential to making good business decisions

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* Amounts in this chart represent the investment growth based on the median stock return of each group each year. Companies included in this analysis are all U.S. companies with listed stocks, which averages about 6,000 companies per year.

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LO5 Rules of Financial Accounting

Investors & Creditors

Financial Accounting Information

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP)

make their decisions based on

Should be based on formal standards

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Current Standard Setting

United States Globally

Financial Accounting Standards Board (FASB)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB) International Accounting Standards Board (IASB)

Governed by

Securities and Exchange Commission (SEC)

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Role of Auditors

Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial

statements.

Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial

statements.

Role of auditors

Help ensure that management has in fact

appropriately applied GAAP in preparing the company’s

financial statements

Help investors and creditors in their decisions by adding credibility to the

financial statements.

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Objectives of Financial Accounting

Financial accounting should provide information that:

• is useful to investors and creditors in making decisions.

• helps to predict cash flow. • tells about economic resources, claims to

resources, and changes in resources and claims.

Financial accounting should provide information that:

• is useful to investors and creditors in making decisions.

• helps to predict cash flow. • tells about economic resources, claims to

resources, and changes in resources and claims.

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An Ethical Foundation

Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior.

Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior.

Poor Business Ethics led to the collapse

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Sarbanes-Oxley Act (SOX)

This act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses

conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.

This act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses

conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.

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Part C

Careers in Accounting

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LO6 Careers in Accounting

Financial accountants Managerial accountants

Budget analystsInternal auditorsTax preparers

Payroll managers

AuditorsTax preparers/plannersBusiness consultants

Traditional roles:

Your employerCorporationsGovernments

Nonprofit organizationsIndividuals

Clients:

(Big 4 and Non-Big 4)

Private AccountingPublic Accounting

Financial accountants Managerial accountants

Budget analystsInternal auditorsTax preparers

Payroll managers

AuditorsTax preparers/plannersBusiness consultants

Traditional roles:

Your employerCorporationsGovernments

Nonprofit organizationsIndividuals

Clients:

(Big 4 and Non-Big 4)

Private AccountingPublic Accounting

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Careers in Accounting (cont.)

Other career options: Governmental accounting, sole proprietorship, and education.

Information managersManagement advisors

Tax plannersAcquisition specialists

FBI agentsSports agents

Financial plannersInfo. tech. developers

Financial analystsForensic accountants

Information risk managers

Investment bankersEnvironmental accountants

Financial advisorsTax lawyers

Expanding roles:

Other career options: Governmental accounting, sole proprietorship, and education.

Information managersManagement advisors

Tax plannersAcquisition specialists

FBI agentsSports agents

Financial plannersInfo. tech. developers

Financial analystsForensic accountants

Information risk managers

Investment bankersEnvironmental accountants

Financial advisorsTax lawyers

Expanding roles:

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LO7 Conceptual Framework

Appendix

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Qualitative Characteristics

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Assumptions for GAAP

Identify all economic events with a particular economic

entity

Identify all economic events with a particular economic

entityNeed a unit or scale of

measurement

Need a unit or scale of measurement

Provide information of an enterprise at regular time

periods

Provide information of an enterprise at regular time

periods Business entity will continue

to operate indefinitely

Business entity will continue to operate indefinitely

Economic Entity Assumption

Economic Entity Assumption

Monetary Unit Assumption

Monetary Unit Assumption

Periodicity Assumption Periodicity

Assumption Going Concern

Assumption Going Concern

Assumption

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End of Chapter 01

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